"In our view, the French government's budgetary position is deteriorating in light of France's constrained nominal and real economic growth prospects," S&P wrote in its research update on the country released Friday.
S&P last downgraded France in November 2013, when it cut its sovereign credit rating to AA. Last month, rival credit agency Moody's said it was keeping its Aa1 rating (the agency's second highest) on French government debt, but maintained its negative outlook.
S&P pointed to France's high per capita income and skilled workforce in explaining the affirmation of an AA rating. But the outlook revision "reflects our view of receding fiscal space for the French government in light of the economy's constrained real and nominal growth prospects against the background of policy implementation risk," S&P wrote.
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France's finance minister, Michel Sapin, told CNBC as the S&P announcement came out that the change of outlook does not represent an issue with France, but is actually about the euro zone.
"Of course it is about France," Moritz Kraemer, who heads sovereign ratings for S&P, told CNBC in response to Sapin's comments. "We indeed think that the risks are increasingly tilted towards the downside, which has to do with a number of things. Some of them are home-made, others of them are indeed sort of a pan-European phenomenon."
Kraemer said S&P is "now quite doubtful" that France can hit its 3 percent 2017 deficit target.
Before the news, Sapin said France had been missing important structural reforms, but that those are now underway.
These reforms are important and broad, Kraemer said, but the country's outlook was changed in part because "the implementation risks are actually quite significant."
According to S&P, the outlook change signals that there is a "1-in-3 likelihood" that events would occur leading to a downgrade from the ratings agency.