Turbulence in French Sovereign Debt: What Are the Implications for Your Intragroup Financing Arrangements?
Against a backdrop of political instability, deteriorating public finances and an unfavourable macroeconomic environment, French government bonds are experiencing a period of turbulence in the bond market. While French sovereign debt remains fundamentally well-rated and liquid, some concerns are nevertheless emerging. In this respect, the yield on the 10-year French OAT rose from 3.17% on 11 September 2023 to 4.42% on 11 September 2026.
Source: Bloomberg, 11 September 2026
Such a situation raises two key issues: first, the potential evolution of France’s sovereign credit rating and, second, the extent to which a risk premium specific to France should be taken into account.
1. Implications of a Further Downgrade of France’s Sovereign Credit Rating
According to the three leading credit rating agencies, as at 11 September 2026, France’s long-term sovereign credit ratings are as follows:● A+, with a stable outlook, from Fitch;● A+, with a stable outlook, from S&P; and● Aa3, with a negative outlook, from Moody’s.
In light of developments in France’s economic, political and fiscal situation, which have contributed to the rise in OAT yields and to previous downgrades of France’s sovereign credit rating, it is possible that certain agencies may further downgrade France’s rating in the future.
Sovereign credit ratings have an impact on corporate credit ratings. On the one hand, they are among the factors assessed by credit rating agencies when measuring the extent to which a company’s activities are exposed to the country risk of the jurisdictions in which it operates. On the other hand, companies are generally unable to achieve a credit rating higher than that of their sovereign (the “sovereign ceiling”).
In the context of intragroup financing, however, assessing the borrower’s credit risk by determining its credit rating is a key factor in establishing the arm’s-length remuneration of an intragroup loan or financial guarantee.
In the event of a further downgrade of France’s sovereign credit rating, two situations should be distinguished:
● Companies benefiting, by virtue of their links with the State, from the potential for extraordinary government support in the event of financial difficulties: a downgrade of the sovereign rating may, in turn, result in a downgrade of their credit ratings. This is particularly the case for companies whose rating is aligned with that of the sovereign. However, this causal link must be assessed on a case-by-case basis, taking into account the company’s stand-alone credit profile and the likelihood of extraordinary government support; and● Other companies: depending on their degree of exposure to the French market, the impact of a sovereign rating downgrade is primarily indirect and is likely to be less significant.
2. Taking into Account the Risk Premium Inherent to France
The country risk premium inherent in French sovereign debt has increased significantly. In recent months, the spread between the OAT and the Bund (the German government bond used as a benchmark in the European bond market) has continued to widen, reaching 92 bps as at 11 September 2026. At the same time, the yield on the 10-year OAT exceeded that of Italian sovereign debt, rated BBB+ by S&P, by a narrow margin of 6 bps on the same date. Furthermore, a further deterioration in this situation could be an indication of a forthcoming downgrade of France’s sovereign credit rating.
Source: Bloomberg, 11 September 2026
The increase in France’s financing costs observed in the market has a direct impact on the financing conditions of French companies. Indeed, there is a strong correlation between sovereign debt yields and those observed on bonds issued by French companies and, more broadly, with the overall financing costs of these companies. However, the degree to which each company is affected by this phenomenon is likely to vary depending on the geographical diversification of its activities.
In the context of intragroup financing, it is well established that the determination of an arm’s-length interest rate should primarily be based on rates observed in comparable financing transactions entered into between independent enterprises. This analysis takes into account, among other factors, the borrower’s credit risk, the economic circumstances of the financial transaction and the characteristics of the financing concerned.
In practical terms, to reflect the increase in sovereign credit risk and interest rates, a risk premium should be incorporated into any financing granted to a borrower with significant exposure to France.