Turmoil in the government bond market has revived concerns over the eurozone debt crisis, with France emerging as the primary focus amid a global sell-off of sovereign debt. Growing apprehension regarding Paris's fiscal standing has driven up borrowing costs, widening the yield spread between French and German 10-year government bonds to its highest level since 2012.
Yesterday, the yield on French 10-year OATs surged to its highest level since 2002 before dipping back as the bond rout moderated. Investor hesitancy has been compounded by political uncertainty ahead of the 2027 presidential elections and mounting concerns over France's public debt, which has reached a record high. Deutsche Bank strategist Jim Reid noted that the Franco-German 10-year spread widened by 13.9 basis points, marking its largest daily jump since March 2020 during the height of the COVID-19 pandemic.
In an effort to stabilize the situation, the French government proposed a budget for next year featuring €43 billion in spending cuts and tax increases. The plan aims to raise the tax burden and curb spending growth by reducing state expenditure while capping increases to pensions and civil servant salaries. Finance Minister Roland Lescure stated that the measures are necessary to place France back on track for deficit reduction.
Despite the proposed fiscal tightening, analysts at ING warn that the French budget deficit would still fall to only 5% of GDP next year—a level they describe as far too high to prevent the national debt, currently at 119% of GDP, from climbing further. ING noted that while the fiscal package prevents the deficit from reaching 6.5% of GDP, it fails to stabilize public debt. With a challenging legislative process ahead, French bonds are expected to remain under pressure while the threshold for European Central Bank intervention remains high.
