France is facing a tough financial situation, grappling with rising debt costs for the third year running, which could shake the government's stability. Last Friday, the yield on France's 10-year government bonds, known as OATs, shot past 4.5%—a level unseen since 2008—and stayed at 4.53% by Wednesday. This creates a noticeable gap with German bonds, a spread not observed since the eurozone debt crisis in 2012.
Prime Minister Sébastien Lecornu is set to present a draft budget for 2027 to parliament in early October. The proposal outlines €54 billion ($61.8 billion) in spending cuts to tackle the swelling debt and one of the euro area's largest budget deficits. But political divisions in the National Assembly, worsened by the absence of an absolute majority, pose a formidable hurdle to getting the budget passed.
France's debt is on track to hit a record 119.3% of GDP by 2026, with projections of climbing further to 121.7% in 2027. Previous administrations have been ousted by no-confidence votes, one in December 2024 and another in September 2025. Lecornu himself faced hurdles passing the 2026 budget, only succeeding in February this year.
Mujtaba Rahman, an expert at Eurasia Group, flagged the risk of the government collapsing if the 2027 budget fails to pass, particularly with presidential elections looming next spring. He pointed out that proposals like a partial pension freeze could meet fierce resistance. Still, Lecornu appears resolute in pushing through fiscal reforms, potentially using special constitutional powers if necessary.
ING strategists Benjamin Schroeder and Michiel Tukker warned that political resistance could thwart efforts to trim the budget deficit from an expected 5.4% this year to 5%. They also noted that upcoming presidential and legislative elections could further complicate government formation and fiscal policy.
During his presidency, Emmanuel Macron has appointed several unpopular centrist loyalists as prime ministers, and the upcoming elections could stir political upheaval, possibly affecting leadership in the National Assembly. The ING strategists forecast the OAT-Bund spread—the difference between French and German borrowing costs—will sit between 100 and 125 basis points in the coming months.
Chris Attfield, a European rates strategist at HSBC, noted that the European Central Bank (ECB) is unlikely to step in to narrow this spread, as it focuses on inflationary pressures. He noted that with non-domestic ownership of OATs now over 50%, there could be volatility if these investors decide to sell.
Lars Machenil, CFO at BNP Paribas, stressed the importance of reducing France's debt but cautioned that lawmakers should ensure the budget is sensible and strategically sound. Despite uncertainties about meeting deadlines, he remains optimistic about the progress being made.
