Tourists use umbrellas to protect themselves from the sun during a heatwave in Paris on July 10, 2026.
Behrouz Mehri | AFP | Getty Images
France’s fiscal deterioration and political gridlock are worrying bond investors, with borrowing costs nearing crisis-era highs as another tough budget battle looms.
The European Union’s second-largest economy has endured repeated political instability and mounting fiscal burdens in recent years. It has repeatedly violated European Commission rules on budget deficits and debt limits, and attempts to bring reforms, spending cuts and tax increases to bring the situation under control have failed, and successive prime ministers have been ousted.
France is subject to the EU’s excessive deficit procedure, with the Council recommending that it eliminate its excess deficit by 2029, but there is a long way to go.
The EU treaty sets the standard value for government deficit at 3% of GDP and the standard value for government debt at 60%. Last year, France’s budget deficit reached 5.1% of GDP, and the debt-to-GDP ratio exceeded 115%.
The IMF predicted in July that France’s total government debt would reach about 118.5% of GDP in 2026, exceed 120% in 2027, and remain above that level until 2030.
At the same time, the economy has struggled to grow, contracting by 0.2% quarter-on-quarter in the first three months of this year and stagnating in the second quarter.
The turmoil has caused severe stress in the country’s bond market, with yields on French government bonds rising dramatically over the past year, exacerbated by the impact of the US-Iran war on global borrowing costs, giving France some of the highest government borrowing costs in the G7.
The yield on France’s 10-year government bond hit more than 4.13% last week, the highest level since 2008, and remained around 4.1% on Friday. Bond yields and prices move in opposite directions.
French 10-year government bond yield
Ideological rifts have emerged in France’s National Assembly, leading to a vote of no confidence, the collapse of the government, and an impasse over the national budget.
France plans to submit its 2027 budget bill to parliament by early October. Last year’s budget stalled, and after months of delays, Prime Minister Sébastien Lecorne forced the bill through parliament.
Lecorne was appointed in 2025, making him the fifth person to hold the position in just two years. He resigned after just 27 days in office, citing political disagreements making it extremely difficult to build a viable government program. Mr. Lecorne was reappointed a few days after his resignation.
Another uncertainty weighing on France’s national debt is the 2027 presidential election, in which far-right candidate Marine Le Pen is currently the front-runner to succeed Emmanuel Macron.
“Poster child” for debt problems
John Stopford, head of multi-asset revenue at NinetyOne, told CNBC that rising deficits and slowing growth are global issues in the wake of the coronavirus pandemic, wars and a spate of energy crises, but France “stands out”.
“This is not just a French problem, but in many ways France is one of the leading countries,” he said on a conference call. “So I don’t think this is unique to France, but France’s finances are going in the wrong direction.”
He said there was a broader challenge for developed world governments to find ways to make ends meet and put debt on a more sustainable trajectory. If they don’t, there will likely be a “bond market revolt” at some point, Stopford added.
“I can see why people are concerned,” he said of France. “It’s not clear how this is going to end in a good way.”
The big uncertainty looming over the OAT market is next year’s presidential election, Stopford said.
Le Pen said during Thursday’s candidate debate that the government “has to cut spending significantly,” adding that she was “very concerned” about the development of Paris’ debt levels.
Marine Le Pen, presidential candidate of the L’Assembremain National Party, in Paris, France, on August 27, 2026.
Lemon Hazen | Getty Images News | Getty Images
But Stopford told CNBC that the market was skeptical about whether Le Pen was so keen to put finances on a more sustainable footing.
“While it is clear that there is a possibility that the government and policy priorities may change after May next year, people are questioning whether there is much appetite for substantive fiscal consolidation,” he said. “Well, I think we may be in crisis. I just don’t know if it’s today.”
There is little sign of improvement
Théophile Legrand, interest rate strategist at Natixis CIB, told CNBC that his team already sees OAT as “prestressed.”
“It’s not just domestic politics that could slow the recovery, but also the broader macro context,” he said. “While markets do not expect France to return to a 3% budget deficit as early as 2027, they are looking for signs that the 2027 budget is consistent with a credible medium-term path to public debt stabilization, which is becoming increasingly difficult to achieve. War-related context and rising long-term interest rates already complicate the fiscal equation, but this summer’s heatwave and bushfires have added further uncertainty.”
Legrand added that the final months of this year and the first quarter of 2027 are when OAT volatility is most likely to rise again, as budget deliberations and presidential dynamics become more closely intertwined.
“Nevertheless, we do not expect the 2024/2025 shock pattern to be repeated. OAT valuations already appear to be quite stressed. Our fair value model suggests that OAT is around 15 basis points even before adding the political premium. “Our year-end forecast is for the spread between the 10-year OAT and German government bonds to be around 75 basis points if the budget is passed, versus around 80 basis points if the budget is not passed and France moves to a special budget law.”
April Larrousse, head of investment specialists at Insight Investments, said that despite the growing number of gloomy headlines related to France’s economy, there is “surprisingly little sign that France is preparing for the kind of fiscal adjustment that seems necessary to its debt dynamics.”
“Growth expectations have been revised downward, debt is expected to continue rising, and bond yields are now at levels not seen since the financial crisis,” he said. “However, meaningful spending restraint remains politically difficult. With pension reform effectively delayed until after the 2027 election and a deeply divided parliament, the government appears more focused on maintaining political stability than addressing fundamental fiscal issues.”
He said the question for investors now is whether policymakers can muster the political will to put public finances on a more sustainable path before market pressures intensify.
“French bonds are already trading cheaper than Italian bonds, which was unthinkable not too long ago, but they could become even cheaper in a negative scenario,” he said.
