Borrowing costs skyrocket in France – Risk premium against Germany at historical highs
France is paying an increasingly higher risk premium on its debt, as investors brace for a third consecutive year of political and fiscal drama surrounding the annual budget, with the threat of another government collapse looming. The yield on the French 10-year government bond—known as the OAT—surpassed 4.5% on Friday for the first time since 2008 and has remained above that level ever since. On Wednesday, it stood at 4.53%.
Spread with Germany exceeds 100 basis points
The yield on the French 10-year bond is now more than one percentage point higher than the yield on the corresponding German benchmark, marking the first time this has occurred since the height of the Eurozone sovereign debt crisis in 2012. The market continues to demand higher compensation for lending to France than even to Italy or Greece, which were the most troubled links during the debt crisis. Across the entire yield curve, France now exhibits one of the highest sovereign borrowing costs among G7 countries.
Representative 30-year government bond yields:
Canada: 4.247%
Germany: 3.843%
France: 5.2292%
Italy: 5.0529%
Japan: 4.16%
United Kingdom: 5.8339%
US: 5.411%
The 2027 budget at the epicenter
The fragile minority government of French Prime Minister Sébastien Lecornu is expected to submit the draft budget for 2027 to Parliament in early October. The debate in Parliament will take place throughout October, with the final vote scheduled for November 17. Lecornu has stated that his goal is to implement spending cuts totaling €54 billion ($61.8 billion), arguing that greater fiscal discipline is required to curb the growth of French debt and reduce one of the largest budget deficits in the Eurozone. Some economists estimate that France is following an unsustainable fiscal trajectory, following last year's credit rating downgrade by Fitch. The French Ministry of Economy announced on Saturday that it expects public debt to reach a record level of 119.3% of GDP in 2026, with a further increase in the debt-to-GDP ratio projected at 121.7% for 2027.
Political deadlock and continuous government collapses
The fiscal situation is complicated by deep political divisions within the French Parliament. Since the snap elections of July 2024, which produced no absolute parliamentary majority, the National Assembly has been in perpetual conflict over the budget. Coexisting within Parliament are the far-right National Rally, the left-wing New Popular Front, and Lecornu's center-right coalition, making consensus extremely difficult to achieve. Governments were toppled by no-confidence votes in December 2024 and September 2025. Furthermore, Lecornu required until February 2026 to pass the 2026 budget, relying on a constitutional provision that allowed him to bypass parliamentary voting.
"A harsh budget could bring down the government"
"A harsh draft budget for 2027 risks bringing down the government, despite a widespread desire to avoid a political crisis before next spring's presidential elections," said Mujtaba Rahman, managing director for Europe at Eurasia Group. As he noted, measures such as a partial freeze on pensions are expected to meet strong resistance from parliamentary factions. However, according to Rahman, Lecornu is likely determined to complete the final months of his prime ministerial term by "pushing through a budget that, at least in theory, will initiate the long process of consolidating France's public finances." This process could involve compromise on individual issues during negotiations with opposition parties in the coming weeks. Alternatively, the government could once again resort to special constitutional powers to pass the budget by the December deadline.
"Time is no ally to French bonds"
The French government's attempt to reduce the budget deficit toward 5% of GDP, down from an expected 5.4% this year, will face "strong political headwinds," according to ING interest rate analysts Benjamin Schroeder and Michiel Tukker. "But even beyond that, we argue that time is no ally to French bond spreads," they noted in a memo on Monday. As they explain, following this year's budget, market attention will shift to the presidential elections. These are expected to be followed by parliamentary elections and another potentially arduous government formation process.
Macron: Nine years of political instability
President Emmanuel Macron has appointed a series of unpopular centrist politicians to the post of prime minister during his nine years in office. Next year's presidential elections could trigger major political realignments at the political extremes, bringing the issue of leadership in the National Assembly back to the forefront. At the same time, high energy prices in Europe and declining European political cohesion add further strain to the environment. ING strategists estimate that the so-called OAT-Bund spread—the yield differential between French and German borrowing costs—will range between 100 and 125 basis points in the coming months.
The ECB is not expected to intervene easily
The European Central Bank (ECB) may not be willing to step in to narrow the spread through bond purchases, as it faces renewed inflationary pressures, according to ING analysts. Chris Attfield, European rates strategist at HSBC, described the widening of the OAT-Bund spread as "much larger than we would expect," given France's debt-to-GDP ratio. However, he estimated that the ECB would likely intervene only if market movements became "disorderly." An additional complicating factor is the increased share of foreign investors holding French OATs, which now exceeds 50%. "If these investors prove less 'stable,' the question arises as to which investors will step up their holdings to offset this trend—and, crucially, at what price," Attfield stated in a Monday note.
BNP Paribas: "It takes time to build a sensible budget"
Speaking on Wednesday to CNBC's Karen Tso, Lars Machenil, Chief Financial Officer of BNP Paribas, emphasized that it is important for French lawmakers to work toward reducing public debt. However, as he stressed, "They should take their time to ensure they have a budget that makes sense and moves in the right direction." When asked whether he believes the budget will be agreed upon and approved before the respective deadlines expire, Machenil replied: "I don't have a crystal ball, but what I see is a willingness to complete the process." "We will see. But if you look at the progress and the timeline, things are moving along well," he added.
French debt at the center of financial markets
France now faces a combination of elevated borrowing costs, heavy sovereign debt, a broad budget deficit, and intense political fragmentation. The trajectory of the 2027 budget will serve as a critical test for the Lecornu government, while markets will closely monitor whether Paris can rein in its deficit without triggering a fresh government crisis. At the same time, the widening spread against Germany indicates that investors are demanding ever-higher compensation to hold French debt, further escalating pressure on the country's public finances.
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