France is paying an ever-higher risk premium on its debt as Prime Minister Sébastien Lecornu prepares a 2027 budget, with the country facing a third straight year of budget drama that has threatened to topple its leader. The country's 10-year bond yield has topped levels last seen in 2008, and strategists warn the pressure on French debt won't ease soon.
France's benchmark borrowing costs jumped to their highest level since 2008 on Friday, a sign investors are bracing for another round of budget chaos in Paris. The yield on France's 10-year government bonds popped above 4.5% and has stayed above that threshold since, last trading at 4.6696% on Thursday.
France's borrowing costs widen against Germany
France's 10-year yield now sits more than one percentage point above German 10-year bonds, a gap not seen since the height of the euro zone debt crisis in 2012. Markets are demanding a steeper premium to lend to France than to Italy or Greece, once considered the region's fiscal problem children. Across the curve, France carries some of the highest government borrowing costs in the G7.
A budget vote that could break the government
Lecornu's minority government will submit its 2027 budget proposal to parliament in early October, with debate running through the month ahead of a Nov. 17 vote. He has said he will target 54 billion euros ($61.8 billion) in spending cuts, arguing tighter discipline is needed to rein in the country's debt load.
France's finance ministry said it expects national debt to hit a record 119.3% of GDP in 2026, with the ratio projected to climb to 121.7% in 2027. Political divisions since the July 2024 snap election have already toppled two governments, in December 2024 and September 2025, and Lecornu only passed the 2026 budget in February by invoking a constitutional clause to bypass parliament.
Mujtaba Rahman of Eurasia Group said a tough 2027 draft risks toppling the government even though most parties want to avoid a crisis before next spring's presidential election. Opposition to measures such as a partial pension freeze could force Lecornu back to special constitutional powers to push the budget through by mid-December, Rahman added.
Strategists see little relief ahead
ING rates strategists Benjamin Schroeder and Michiel Tukker wrote that the government's push to bring the deficit back toward 5% from an expected 5.4% this year will face strong political headwinds. According to ING: "we argue that time is not in favour of French bond spreads." The strategists forecast the OAT-Bund spread will hold between 100 and 125 basis points in the coming months, and say the focus will likely turn to next year's presidential election, probably followed by legislative elections.
Source: CNBC
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