France is facing an increasingly deep fiscal and political crisis, with borrowing costs returning to levels not seen since the financial crisis and public debt continuing its upward trajectory. As Emmanuel Macron's governments fail to enforce a consistent fiscal line and parliament remains deeply divided, attention is already shifting to the 2027 presidential election. There, Marine Le Pen appears emboldened, positioning herself as the political force openly calling for drastic government spending cuts to address the explosive debt.
Political instability and fiscal pressures
The European Union's second-largest economy has confronted repeated political instability and rising fiscal pressures in recent years. It has continuously breached European Commission rules on fiscal deficits and debt ceilings, while successive prime ministers have been removed from office following failed attempts at structural reforms, spending cuts, and tax increases intended to bring the situation under control. France remains subject to the EU's excessive deficit procedure, with the Council recommending an end to its excessive deficit by 2029. However, the country still faces a long road ahead. EU treaties set reference thresholds of 3% of GDP for fiscal deficits and 60% for public debt. Last year, France's deficit reached 5.1% of GDP, while its debt-to-GDP ratio surpassed 115%. The IMF projected in July that France's gross public debt will reach approximately 118.5% of GDP in 2026 and exceed 120% in 2027, remaining above that level through 2030. At the same time, the broader economy is struggling to generate growth, having contracted by 0.2% quarter-on-quarter in the first three months of the year before stagnating in the second quarter.
Pressure on French bonds
The ongoing turmoil has triggered intense pressure across French government bond markets, with yields rising dramatically over the past year—further compounded by the impact of the US-Iran war on global borrowing costs. Consequently, France now confronts some of the highest sovereign borrowing costs among G7 nations. Yields on 10-year French sovereign bonds reached their highest level since 2008 last week, surpassing 4.13%, and remained near 4.1% on Friday. Bond yields and prices move in opposite directions.
Political crisis
The French National Assembly is ideologically fragmented, regularly leading to no-confidence motions, government collapses, and total deadlocks over the state budget. France is scheduled to submit its 2027 draft budget plans to parliament by early October. Last year's budget process resulted in severe political gridlock, with Prime Minister Sébastien Lecornu eventually forcing the bill through parliament after months of delays. Lecornu became the fifth prime minister in just two years upon his appointment in 2025. He resigned a mere 27 days after taking office, arguing that deep political disagreements made establishing a functional governing agenda virtually impossible. Lecornu was reappointed just days after his resignation.
The 2027 elections
An additional layer of uncertainty weighing heavily on French sovereign debt is the 2027 presidential election, in which far-right candidate Marine Le Pen is currently considered the frontrunner to succeed Emmanuel Macron. John Stopford of Ninety One told CNBC that swelling deficits and slowing growth have escalated into a global challenge following the Covid-19 pandemic, geopolitical conflicts, and successive energy shocks, but France "stands out." "It's not just a French problem, but one could argue that in many ways France is one of the most prominent examples," he noted. "So I don't think it's unique to France, [but] France's public finances are moving in the wrong direction." As he observed, a broader structural challenge confronts developed economies: finding a path to balance budgets and place public debt on a sustainable trajectory. Failing to do so risks triggering a bond market rebellion, Stopford added. "I understand why people are concerned," he said regarding France.
"It's not obvious how this ends well." The primary cloud hanging over the French sovereign bond market remains next year's presidential election, Stopford emphasized. During a candidates' debate on Thursday, Le Pen asserted that the government "must drastically reduce its spending," adding that she is "extremely concerned" about the trajectory of Paris's debt load. However, Stopford told CNBC that market participants remain skeptical about whether Le Pen possesses genuine appetite to restore public finances to a sustainable footing. "It is clear that we could see a regime change or shift in policy priorities after May next year, but there is widespread doubt that a strong appetite exists for meaningful fiscal consolidation," he remarked. "So, yes, I believe we may be heading toward a crisis. I'm just not certain it is unfolding today."
Few signs of improvement
Théophile Legrand from Natixis CIB told CNBC that his team already views French sovereign bonds as being in a "state of pre-existing severe strain." "What could delay a recovery is not merely domestic politics, but also the broader macroeconomic environment," he said. "The market does not expect France to return to a 3% deficit target as early as 2027, but it is seeking signals that the 2027 budget aligns with a credible medium-term trajectory to stabilize public debt. That trajectory is becoming increasingly difficult to achieve. The environment shaped by war and higher long-term yields already complicates the fiscal equation, while this summer's heatwaves and wildfires add another layer of uncertainty." The final months of this year and the first quarter of 2027 represent the most likely window for a new wave of volatility in French sovereign bonds (OATs), Legrand added, as budget negotiations and presidential developments become inextricably linked.
"However, we do not expect a repetition of the 2024/2025 shock pattern. OAT valuations already appear significantly depressed: our fair value model indicates OATs are trading approximately 15 basis points cheaper than fair value even before accounting for any political risk premium, while our year-end forecast places the 10-year OAT spread against German Bunds around 75 basis points if the budget passes, versus roughly 80 basis points if it fails and France transitions to special emergency spending legislation," he explained. April LaRusse from Insight Investment noted that despite increasingly grim headlines surrounding the French economy, there are "surprisingly few indications that France is preparing for the type of fiscal adjustment that its debt dynamics clearly demand." "Growth forecasts are being revised downward, debt is expected to keep climbing, and bond yields have reached levels not seen since the global financial crisis," she said. "Yet meaningful spending restraint remains politically difficult. With pension reform effectively frozen until after the 2027 elections and parliament deeply fragmented, the government appears focused on maintaining political stability rather than addressing the underlying fiscal problem." The question for investors now, she added, is whether policymakers can summon the political will to place public finances on a sustainable trajectory before market pressures escalate further. "French sovereign bonds are already trading cheaper than Italian equivalents—a scenario that until recently would have been unthinkable—but they could become cheaper still under a downside scenario," she concluded.
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