Macro & Markets: Core no more

France's fiscal and political deterioration should keep its sovereign spreads wider, although a euro-crisis-style debt event is not the base case.

• The OAT-Bund spread widened from below 60 basis points in January to about 175 basis points in late October, and French spreads recently traded wider than Italian spreads.
• The government expects a deficit of 5.4% of GDP this year and 5.0% in 2027, while public debt is projected to rise from about 116% of GDP in 2025 to above 120% in 2027.
• Interest payments currently equal about 2.5% of GDP and could approach 5% if the average interest rate on outstanding debt rises above 4%; Italy's current interest burden is about 4% of GDP.
• Political gridlock has persisted since the 2024 dissolution, with three blocs in the National Assembly, two prime ministers falling, and the 2026 budget passing after the pension reform was suspended.
• The authors identify three medium-term paths: fiscal reform with a parliamentary majority, a populist turn that could trigger sharp spread widening, and continued gridlock with deficits near 5% and a gradual rise in debt.
• ECB support through the Transmission Protection Instrument is unlikely to underwrite domestic fiscal choices while France remains under the excessive deficit procedure, especially as the ECB is hiking rates and reducing its bond holdings.

Takeaway: French bonds face a weaker medium-term risk profile and spreads are likely to settle above their pre-2024 levels; investors should monitor fiscal consolidation, the 18 April and 2 May presidential election dates, and the risk that prolonged gridlock eventually forces a policy correction.