The French risk: memories of the euro crisis might not be a good benchmark

France’s fiscal and political vulnerabilities could drive a renewed eurozone risk episode, but a full-scale crisis is not inevitable.

• The spread between French government bonds and German Bunds exceeded 140 basis points in early October, while France’s debt is expected to reach 121.7% of GDP next year.
• The draft 2027 budget targets €43 billion of savings and a 5.4% deficit, but the government lacks a parliamentary majority and could face a no-confidence vote if it relies on Article 49.3.
• Presidential elections in April are an additional catalyst: Marine Le Pen leads polls at more than 30%, while Jean-Luc Mélenchon’s proposal to write off 20% of national debt could further unsettle investors.
• Foreign investors hold 57% of French national debt, increasing the risk that a loss of confidence could amplify spread widening; ECB support through the unused Transmission Protection Instrument would also be conditional.
• French sovereign bonds therefore warrant caution, while corporate bonds offer more attractive fundamentals; internationally exposed large caps and exporters should be more resilient than domestic companies and small caps.

Takeaway: Investors should remain cautious but avoid assuming an inevitable euro crisis, favouring Investment Grade credit, neutral duration, emerging markets, selected commodities and currencies while awaiting clearer signals from the budget process, elections and corporate earnings.