France’s Debt Crisis Deepens with Historic Yield Peaks
- France’s 10-year government bond yields surpass 4.5%, reflecting rising investor concerns.
- Projected national debt expected to reach a record 119.3% of GDP in 2026.
- Political turmoil continues as budget disputes lead to government instability ahead of the 2027 elections.
France is facing an escalating risk premium on its debt, with investors preparing for a tumultuous third consecutive year concerning its national budget, which could potentially destabilize the current government. The yield on the country’s 10-year government bonds, known as OATs, surpassed 4.5% for the first time since 2008 on Friday and has remained above that level, recently trading at 4.53% on Wednesday.
This yield is more than one percentage point higher than that of German 10-year bonds, marking the first such instance since the euro zone sovereign debt crisis in 2012. Investors are now seeking greater compensation for lending to France compared to its peers, including Italy and Greece, traditionally seen as problematic from an economic standpoint.
According to a report from the French finance ministry last Saturday, national debt is expected to reach an unprecedented 119.3% of gross domestic product (GDP) in 2026, with projections showing a further increase to 121.7% in 2027. This follows the snap election in July 2024, which did not yield an absolute parliamentary majority, catalyzing political divisions among various parties in the National Assembly, including the far-right National Rally and the left-wing New Popular Front.
Recent political turmoil has seen several administrations ousted due to no-confidence votes, including those in December 2024 and September 2025. French Prime Minister Lecornu was compelled to utilize a constitutional clause to pass the 2026 budget in February of this year, bypassing the usual parliamentary approval process.
‘Time is not in favor’ of French bonds
Mujtaba Rahman from Eurasia Group indicated that the preparation of a challenging draft budget for 2027 poses risks to the government’s stability, despite a common desire to avoid a crisis prior to the presidential election in spring 2027. He warned that proposals like a partial pension freeze could face significant opposition from parliamentary factions.
Strategists at ING, Benjamin Schroeder and Michiel Tukker, noted that the government’s objective to reduce the budget deficit from an anticipated 5.4% this year to 5% is likely to encounter considerable political resistance. They warned that following this year’s budget, the focus will shift towards the upcoming presidential elections, likely resulting in a difficult governmental reformation process.
President Emmanuel Macron has surrounded himself with centrist allies throughout his tenure. Analysts predict that the upcoming presidential election could bring radical changes to the political landscape, further complicating the leadership situation within the National Assembly.
As European energy costs remain high and solidarity within the EU erodes, ING analysts foresee the spread between French and German bond yields, known as the OAT-Bund spread, settling between 100 and 125 basis points in the upcoming months. They expect that the European Central Bank might refrain from intervening to narrow this spread, as it focuses on addressing inflationary pressures.
BNP Paribas CFO Lars Machenil emphasized the importance of a sensible budget approach to reduce national debt, suggesting that lawmakers should ensure that the upcoming budget is well-structured. Despite uncertainty, he expressed cautious optimism regarding the chances of achieving budget agreement before deadlines lapse.
News Courtesy of CNBC
