France’s Decades of Deficits Bring Home a Painful Risk Premium

After decades of budget deficits and steadily rising debt, markets are putting a new price on French risk.

Investors are charging much more to hold government bonds, the stock market is under pressure and the cost of insuring bank bonds against default has jumped. The euro fell to its weakest level since May 2025 on Monday, reflecting fears that upheaval will spill beyond France’s border.

Immediate relief looks unlikely. Far-left and far-right politicians are vying to replace centrist Emmanuel Macron in an election that’s still more than six months away. The government is trying to pass a budget but faces stiff opposition from hostile lawmakers. High school students and public sector workers are protesting in the street, adding to the political upheaval.

“Reality is catching up with us,” said Prime Minister Sebastien Lecornu, warning of the rapid increase in borrowing costs.

Here are some of the ways that political and fiscal risk are showing up in markets:

Bonds

Once considered one of Europe’s safest bond markets, investors are demanding bigger payouts on government debt. France’s 10-year bonds are the worst performers of any Group of 10 economy this year, with yields on the benchmark rising almost 0.6 percentage points since the start of September to 4.75%.

Measured another way: The difference between what France and Germany pay to borrow over a decade widened to 1.59 percentage points on Friday, the biggest premium since the euro zone debt crisis in 2012. While the gap has narrowed since then, investors remain on edge.

Politics are at the root of the shift. Sentiment has soured because investors are looking ahead to the presidential election, according to Irina Kurochkina, portfolio manager at Aegon Asset Management. Far-right candidate Marine Le Pen and far-left hopeful Jean-Luc Mélenchon are top contenders.

“With centrist parties losing ground, investors are not comfortable with the outcome of the extreme right versus left,” said Kurochkina. “There’s a risk they can’t make any decisions on the budget front and so you’re left asymmetrically exposed to bad outcomes.”

Read more: Whispers of Contagion Risk Return to Europe’s Bond Market

Le Pen, who leads in the polls, has proposed radical policies in earlier campaigns, including pulling France from the euro. She’s now seeking to reassure investors, sketching out plans to slash the deficit by reducing transfers to the European Union and cutting outlays related to immigration.

Yet there’s no easy fix. George Moran and Peter Schaffrik, strategists at RBC Capital Markets, said the swelling deficit can be traced to the decision in 2018 to reduce employers’ contributions to the social security system.

“France cannot get out of this situation with a one-off painful budget,” they said on Monday.

Stocks

Companies in France’s CAC 40 stock market index make less than 20% of their revenues at home, but they’ve still been hit. The benchmark index has declined 3.9% this year through Monday, compared to a 7% gain for the pan-European Stoxx 600.

The wider gap between yields on French and German government debt has reduced the appeal of financial industry stocks, with banks in particular trailing international peers. Domestically oriented sectors such as infrastructure-related firms and real estate have also sold off.

Read more: Budget Fight Looms With Paris Market Looking Frail

Gilles Guibout, head of European equities at BNP Paribas AM, said he trimmed exposure over the summer to stocks that have high exposure to the French economy and heavily regulated companies that might be charged more tax.

More than €2 billion ($2.2 billion) was erased from the value of French airport and highway operators last Tuesday after the government said it’s considering higher taxes on transport infrastructure, highlighting the risks.

“We’ve adjusted our portfolio to take the incoming volatility into account and we’ll continue to do so accordingly,” Guibout said.

Credit

The price to insure French bank bonds against default has jumped above that of other European lenders.

One example: The cost of insuring €10 million of Societe Generale SA debt against default for five years rose to €103,000 a year on Monday. That’s about €16,500 more than for comparable Deutsche Bank AG debt. As recently as late August, the two cost the same to insure.

Credit default swap spreads are much higher for French lenders BNP Paribas SA and Credit Agricole SA than for major banks in the UK, Germany, Switzerland and Spain.

“Higher rates, renewed fiscal concerns and mounting uncertainty have finally broken the recent calm in euro credit,” ING Bank strategists Jeroen van den Broek and Timothy Rahill said on Monday. They described the weakness as “most pronounced” in France.

Currencies

The euro’s slide reflects worries that France’s problems could spread beyond its borders.

While investors have steered clear of direct comparisons to the euro zone crisis of 15 years ago, Barclays FX strategists including Themistoklis Fiotakis see downside risks for the single currency, even if France manages to pass a budget.

“France’s fiscal problems are daunting enough in their own right, but are made even harder to fix by the upcoming presidential election and a hung Parliament where consensus building has often proved to be an impossible task,” they wrote on Sunday.

Some investors see market turmoil extending into the post-Macron era.

What Bloomberg Strategists Say ...“French risk is now feeding clearly into the euro, creating another source of pressure on French debt. Rising yields hurt bond returns, but long-term investors can hold bonds to maturity. Unhedged foreign investors have another problem: a weaker euro compounds those losses.”— Skylar Montgomery Koning, macro strategist. For more, click here.

“France isn’t somewhere we’ve gone yet despite the selloff,” said David Zahn, head of European fixed income at Franklin Templeton Investment Management. “There’s a lot of volatility and that’s something we expect to continue until after the election, and that’s putting us off.”