Budget dispute in France increases pressure on government bonds — CNBC
In France, preparations for a tough 2027 budget could once again jeopardize government stability amid rising government borrowing costs. The yield on 10-year French OAT government bonds exceeded 4.5% for the first time since 2008 and stood at 4.53% on Wednesday, CNBC reports.
The spread between yields on 10-year French and German bonds exceeded one percentage point for the first time since the peak of the eurozone debt crisis in 2012. The market is demanding higher compensation for lending to France than to Italy or Greece. The yield on France's 30-year bonds stood at 5.2359%, one of the highest levels among G7 countries.
Debt and budget deficit
France's Finance Ministry expects public debt to reach a record 119.3% of GDP in 2026, while the debt-to-GDP ratio is expected to rise to 121.7% in 2027. The government is trying to reduce the budget deficit from the 5.4% of GDP expected this year to around 5%.
Political disputes over the budget intensified after the snap parliamentary elections in July 2024, which gave no force an absolute majority in the National Assembly. Parliament includes the far-right National Rally party, the left-wing New Popular Front, and Lecornu's center-right group. Governments lost power following no-confidence votes in December 2024 and September 2025.
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Risks for Lecornu's government
In February, Lecornu secured the adoption of the 2026 budget through a constitutional mechanism that allows parliament to be bypassed. Mujtaba Rahman, managing director for Europe at Eurasia Group, believes that the 2027 draft budget could lead to the government's fall, despite political forces' desire to avoid a crisis ahead of presidential elections next spring.
In his assessment, parliamentary factions will object, in particular, to a partial freeze on pensions. The government may seek compromises with its opponents or again use special constitutional powers to pass the budget before the mid-December deadline.
ING strategists Benjamin Schroeder and Michiel Tukker forecast that the spread between French and German borrowing costs will range from 100 to 125 basis points in the coming months. They also suggest that the European Central Bank may not rush to buy bonds to narrow this gap, as it is focused on renewed inflationary pressure.
