‘Not sustainable’ – French borrowing costs soar amid Budget and election uncertainty
France is facing a period of acute bond market stress that could last several years unless the presidential frontrunners for next year’s election commit to tackling its gaping deficit, analysts have warned.
The difference between French and German government borrowing costs – a key metric used to determine French debt risk – widened beyond 120 basis points for the first time since 2012 on Wednesday, just a day before France unveils its Budget for 2027. The country’s bonds – known as OATs – are also trading 22 basis points higher than their Italian equivalents, the highest since the Eurozone was established.
Both measures have climbed dramatically over the past few weeks amid heightened speculation over France’s fiscal plans and increasing evidence of price pressures spreading through its economy. Inflation was found to have risen to a two-year high of 3.4 per cent on Wednesday, fuelled largely by surging energy costs from the Iran war.
Meanwhile, its debt agency announced earlier this week plans to issue some €340bn (£290bn) of OATs over the next year as the country looks to plug its yawning budget deficit.
The deficit is currently on track to swell around 5.4 per cent this year – up from 5.1 per cent in 2025 – despite a protracted effort from ministers to convince a restive French parliament for the need for spending cuts.
“They’re running significantly higher than the target that the EU set,” George Martin, senior fixed income analyst at Raymond James, told City AM, referring to the country’s stubbornly high deficit. “You’re significantly higher than zero, and whether it’s five per cent or 5.5 per cent or 4.8 per cent, it’s… not sustainable. It’s not a positive outlook for the next few years.”
Presidental election hangs over French economy
Adding to uncertainty is next year’s looming presidential election. The build up to the poll has seen parties jostle for position promising more taxpayer handouts. It has also made the likes of National Rally leader Marine Le Pen and her left-wing rival Jean-Luc Melenchon unwilling to compromise on spending measures proposed by President Macron.
“Populists in charge of a fiscally weak nation like France are likely to spook bond investors, and we could see this French bond premium maintained for the long term,” Kathleen Brooks, research director at XTB, said.
Current polling suggests the two populist leaders will face off in the country’s second round vote. That would leave no establishment part in the final two for the first time in France’s history, and mean the “cordon sanitaire” – a custom whereby French voters conspire to block a hard-right party from power – less likely to hold.
Melenchon’s La France Insoumise has surged in popularity in recent months on a far-left ticket promising to ramp up public investment and ramp up taxes on high earners and wealth. His headline pledges include boosting public spending by roughly €250bn a year and lowering the retirement age to 60.
James Carter, co-head of fixed income at W1M, told City AM spreads between OAT yields and German bunds were becoming “difficult to ignore”.
“France is still the Eruozone’s second largest economy, with deep and liquid debt markets,” he added.