By Amanda Cooper, Harry Robertson and Niket Nishant
LONDON, Oct 2 (Reuters) – French markets are under growing pressure from mounting worries about high debt levels and political gridlock as next year’s presidential election nears.
The French government is seeking €54 billion ($61 billion) in savings in its 2027 budget proposal amid protests at schools across the country over a lack of resources.
Here’s a look at five key metrics that have started to flash a warning, potentially further hampering the government’s ability to rein in its strained finances.
RISK PREMIUM HITS CRISIS LEVELS
The gap between French 10-year borrowing costs and their German equivalents, a measure of the risk premium attached to French debt, has risen to its highest since the euro zone crisis in 2012, at around 150 basis points.
The speed of the move has surprised markets. The French risk premium hasn’t blown out this quickly in the space of a week since 2011, when the debt crisis was raging.
Ultimately, the European Central Bank has tools to prevent any euro zone member’s bond yields from spiralling out of control, although analysts believe there is little chance the central bank would need to resort to those for France yet.
“Clearly, the market is testing the political situation, telling the politicians: ‘you need to be careful with the budget,'” Marion Le Morhedec, CIO of fixed income at Fidelity, told an event on Friday.
STOCKS AND BANKS LAG
France’s stock market, down nearly 4% this year, has lagged broader European markets, which are up roughly 6%.
Economic growth is slowing. The Bank of France expects an expansion of just 0.4% this year, down from 0.9% in 2025.
Domestic banks have struggled in this low-growth environment given concerns about political uncertainty and high government debt.
Credit Agricole shares are down 3.8% this year and Societe Generale is down nearly 4%. BNP Paribas shares are up 13.3% in 2026, but are well below the highs of the year. The broader European STOXX banking index is up 14% in 2026.
AT1 bonds, a form of riskier debt issued by French lenders, have come under pressure along with the rest of the market, but less so than France’s government debt, suggesting investors are not too concerned yet about the pressure on the banking sector.
AT1 bonds act as shock absorbers if a bank’s capital levels fall below a certain threshold. They can be converted into equity or written off.
CREDIT RISKS MOUNT
The cost of insuring French sovereign debt against an increase in default risk has continued to soar, LSEG data shows.
With bond yields rising everywhere, credit default swaps have risen for most sovereigns, but the speed at which they have increased for France is far greater than anywhere else.
French 5-year CDS trade around 87 basis points, the most since early 2013. That means it costs 87 cents annually to insure every $100 held in French bonds. That’s still below the record highs near 200 bps in 2012, but nearly triple what it was just one month ago.
In the last three months alone, French CDS have risen 60 bps, compared with 50 bps for Italy and little change for German, US or UK CDS.
EURO GLOOM DEEPENS
The weaker euro could compound the government’s fiscal problems by making imported goods and energy more expensive.
The euro has fallen below $1.13 to its weakest level in nearly 18 months, while euro zone bond yields have risen. A falling currency and rising yields typically reflect heightened investor unease.
The rise in bond yields has effectively tightened credit conditions enough to prompt traders to assume the ECB will deliver at least two hikes in the coming year, with a roughly 50/50 chance of a third, down from an expectation for at least three hikes last week.
Some ECB policymakers have also sought to temper aggressive market expectations for rate hikes.
“With growth facing renewed headwinds and French sovereign stress tightening financial conditions independently, we remain sceptical that the ECB can sustain the deposit rate materially above 3%,” strategists at Monex said.
The ECB deposit rate is currently at 2.5%.
CONTAGION RISK
One of the principal worries with any major market move is contagion — where investors are forced to sell other assets to cover losses elsewhere — that adds to the down-draught.
Italian debt has been performing better than French debt for several years now, as the government in Rome made strides to bring the country’s finances into order.
But given Italy’s large deficit, its bonds and CDS have been pummelled too. Investors now demand an extra 120 bps to lend to Italy for 10 years, rather than Germany, up from just 73 bps at the end of June.
UBS analysts said they see the spread hitting 150 bps.
Even Belgium, generally regarded as lower risk, has seen its risk premium nearly double in the second half of the year to 90 bps.
(Reporting by Harry Robertson, Amanda Cooper, Niket Nishant and Dhara Ranasinghe; Editing by Xevi Fontdegloria)
