Risks ahead for banks after Fitch’s move

Now that Fitch has decided to downgrade the rating assigned to France’s public debt, and therefore its OAT government bonds, what could happen not only to the OAT-Bund spread, but also to French banks?

A view, following the rating agency’s move, was presented by Massimo Spagnol, Fixed Income Portfolio Manager at Generali Asset Management.

Even before the collapse of the Bayrou government, considered a virtually cast die ahead of the National Assembly vote on Monday, September 8, 2025, a warning about the future of French banks and the repercussions of the political crisis on Paris’ debt was issued by Scope Ratings.

Generali Asset Management: "This downgrade and spread could penalize French banks"

Starting from the comment of Massimo Spagnol, portfolio manager of the fixed income division of Generali Asset Management, the reflection was the downgrade announced last Friday, September 12, 2025, by rating agency Fitch, which " downgraded France’s credit rating by one notch from AA- to A+, causing government bonds to lose their AA category rating, reaching an unprecedented level ".

Main reasons: " high debt and political fragmentation ", factors that are undermining fiscal consolidation.

All this, while Emmanuel Macron’s France awaits other crucial dates, namely, the verdicts of the other two big rating agencies, in addition to Fitch, and others And all this, while a very specific warning is already sounding: if Paris bonds were hit by another downgrade, a forced sale could materialize, which would really put government bonds in trouble, surge in interest costs and trigger a vicious cycle.

Spagnol commented on the possible evolution of French banks in this context and, also, the 10-year France-Germany spread (under special observation along with the Italy-France spread, which practically disappeared after the fall of the Bayrou government and continues to hover around zero).

Regarding French banks, the estimates are not at all comforting. Moreover, the doom loop phenomenon, i.e., the strong correlation between a country’s banks and its government bonds, means that the rejection of a sovereign bond also has negative consequences for the credit institutions of the nation affected by the downgrade.

Spagnol consequently admitted that "this downgrade (by Fitch) and a further widening of the spread could" effectively "penalize French banks and their stability ."

Generali Asset Management’s message is encapsulated in the title of the note drafted by the manager: "France, spread in the 75-80 basis point area for the whole of September. Stability of French banks at risk ."

France-Germany 10-year spread: what could happen in the short term. Focus also on the Italian spread.

The title of the Generali Investments note also highlighted the outlook for the 10-year OAT-Bund spread.

"Looking at the interest rate market, the 10-year spread between French and German government bonds (10-year OAT-Bund spread) has been priced in around 80 basis points since the second half of August, thus incorporating this negative event. Now the market is waiting to see whether Sébastien Lecornu, the newly appointed prime minister, will have the strength to pass the budget law and with what debt reduction measures. The budget presented by Bayrou in July, featuring record cuts of €44 billion, will be adjusted but probably not completely changed and will have to be presented to parliament in the first half of October."

This means that, Spagnol points out, "the evolution of the spread will depend on the approval of the budget law and therefore on the French political balance."

Regarding what may happen in the immediate future, the comforting note for France from Emmanuel Macron and Sébastien Lecornu is that the manager writes, " for the moment, we do not expect further widening ." At the same time, it is true that " the situation must be carefully monitored week by week ."

The most likely scenario is that " the spread will remain in the 75-80 basis point area for the entire month of September and until further updates, given the critical situation in France."

The manager also addressed the case of the Italy–France spread narrowing to zero, i.e., 10-year BTP-OAT, another phenomenon that became apparent on the markets immediately after the collapse of the Bayrou government.

“Finally, it should be noted that the French 10-year and Italian 10-year bonds are currently pricing in the same rate level (3.48%), even though the assessments of international rating agencies to date suggest a more stable economic, financial, and fiscal picture for the Italian state than the French one, particularly considering the control of debt dynamics.”

The other spread to monitor, namely the 10-year BTP-Bund spread, remains under control, as Spagnol notes, “ hovering at its lowest levels since 2009 .”

Scope Ratings’ Analysis of French Banks

An analysis of the risks facing French banks related to the risk associated with France’s public debt had already been anticipated in early September by Scope Ratings, the European rating agency, in the note titled " Political Instability Increases Risks to French Banks’ Profitability Outlook ".

In that report, the analysts noted "the steady improvement in profitability through the first half of 2025, with net profits rising for the four main groups (BNP Paribas, Crédit Agricole, BPCE, and Société Générale)".

Scope, however, also spoke of "a highly unstable political environment," a factor that risked "compromising recent progress, through a decline in credit demand, increased funding costs, and capital volatility linked to high exposure to government bonds (between €40 and €100 billion per group)."

The experts cited the following key points:

• Profitability risk: After lagging behind European peers in 2023-2024, French banks benefited from new loan production at higher yields from the second half of 2024, strengthening retail and corporate revenues. A prolonged political crisis, however, could slow households and businesses’ borrowing, reducing loan growth.
• Funding costs: The largest institutions have a diversified funding structure (deposits, covered bonds, preferred and non-preferred senior debt). Although covered bonds appear less sensitive to sovereign spreads and much of the 2025 requirement is already covered, a persistent widening of spreads would impact wholesale costs, particularly relevant given that French banks are the largest issuers of wholesale debt in the EU.
• Capital Volatility: Exposures to French government bonds (OATs), ranging between €40 billion and €100 billion per individual institution, could generate fluctuations in CET1 ratios if volatility persists. BNP Paribas (CET1 target at 12.5%) and Société Générale (13.5%) are more exposed than Crédit Agricole and BPCE (over 15%) (the latter bank owns Natixis, a company with which Assicurazioni Generali wants to create an asset management giant, through a deal much disliked by the Meloni government and Italian politicians).

And now that Fitch has kicked off a season of French rating reviews—a highly uncertain period—by immediately downgrading the OAT ratings, not only is uncertainty intensifying about the fate of Paris debt securities but, precisely because of the doom loop, that is, exposure to sovereign paper. which affects the domestic banking sector, also because of the price that the banks will pay.

Original article published on Money.it Italy 2025-09-15 14:31:07. Original title: E ora, rischi per queste banche