France faces an increasingly challenging debt trajectory. In it's budget proposal last week, it planned to cut the deficit to 5.0% of GDP in 2027 (above initial plans to cut it to 4.7%), from an expected 5.4% this year. This public sector belt-tightening comes amid higher interest rates, energy costs and inflation related to the Iran war. The French presidential election next year and likely legislative elections soon after add an extra layer of complication to the 2027 budget debate as candidates and parties may wish to distance themselves from consolidation efforts. Amid these fiscal challenges, the 10yr OAT-Bund spread widened notably in recent days to a peak of nearly 160bp, now standing at around 140bp. This 10yr spread is up from around 70bp at the start of 2026, and it was only last at similar levels amid the sovereign debt crisis in 2011/12. We think the 10yr OAT Bund spread might reach 175 bps by Dec’26. We also don’t think that ECB has yet reached the pressure situation of unleashing TPI for France.
