The persistent increase in the financing costs of the French state has raised alarms among the main fund managers, who increasingly consider the maneuvering margin of the Gallic Government to be limited.
In parallel, experts are beginning to point out that the pressure on sovereign credit is already filtering into the country's banking system, introducing vulnerabilities in the balances of the entities due to their exposure, albeit moderate, to public debt.
To the global concern about a possible debt crisis, France adds internal political risk and a wave of sovereign bond sales recorded this week, factors that have further pushed the yields of public debt.
In this context, the yield of the French 10-year bond (OAT) has reached 4.99%. Although the country's sovereign paper has not yet surpassed the psychological threshold of 5%, it is already moving at levels not seen since 2002.
As a result, the spread between the OAT and the German Bund has widened to around 150 basis points. "The technical outlook does not lead us to believe that we have yet reached a ceiling. In fact, we consider that several politicians are guilty of adding fuel to the fire with various irresponsible comments, and the environment is such that, unfortunately, there is an abundance of lack of judgment on the part of those in leadership positions or those aspiring to them," said the portfolio manager of TwentyFour AM (Vontobel boutique), Jakub Lichwa, in a recent report.
The tension is such that, in recent statements, the governor of the Bank of France, Emmanuel Moulin, acknowledged that the country's fiscal position is "very complex," although he ruled out the need for action from the European Central Bank (ECB) considering that the Executive can react with a budget that ensures not exceeding a deficit of 5%. "France should not seek solutions in Frankfurt, the solutions are at home," defended Moulin.
However, the major analysis firms disagree and point to a combination of factors as the source of the problem. The chief economist of Ostrum AM (Natixis IM), Philippe Waechter, warned in a recent study that the stagnation of revenues, energy-related inflation, high interest rates, and the exhaustion of the budget margin have left the French economy "without a safety net."
The main macroeconomic data is starting to show signs of wear and, most concerning, none presents "room for flexibility to adjust," according to Waechter. In the face of new shocks, such as additional interest rate hikes or a persistent rise in the cost of living, he fears "greater destabilizing effects" than a mere slowdown in growth.
"In an economy that has fiscal and financial reserves, the effects of a disturbance are transmitted gradually and can be absorbed over time. Today, this is no longer the case. The coincidence of multiple imbalances and the succession of disturbances leave the economy without growth engines, while eroding its capacity for adaptation and its flexibility to make necessary adjustments," emphasized the Chief Economist of Ostrum AM.
In the same vein, the Chief Economist of Allianz Global Investors, Sean Shepley, believes that to attract new capital to French debt, it is not enough to offer a high yield premium, but credible signals of budgetary discipline are essential. However, he warned that "electoral commitments and their subsequent execution do not always go hand in hand," referring to campaign promises.
The risk shifts to banking
The instability of the debt market is already reflected in the financial sector. In the last five trading days, French entities have performed worse than the rest of the European banking sector, both in the stock market and in the credit market. BNP Paribas has dropped 2.4% in the week; Crédit Agricole, 3.7% and Société Générale around 5%.
In business terms, higher yields on public debt are usually less favorable for French banks, which tend to hold long-duration assets (such as mortgages) financed with deposits, which can lead to margin compression.
Furthermore, managers warn that the current context raises the probability that rating agencies will downgrade the rating of French sovereign debt, with the consequent drag effect on banks, which hold part of that liability and would see their financing become more expensive. "The sector would be less competitive globally and would limit the granting of loans," anticipated the portfolio manager of TwentyFour AM as one of the possible scenarios.
At the same time, in the face of large public deficits, analysis firms fear that the Government will resort to new taxes on sectors with sustained growth, such as banking, or to increases in existing taxes to compensate for the deterioration of the accounts, which would put downward pressure on the profitability of the entities.
Globalization as a shield
On the positive side, French banks are not among the largest holders of public debt of their own country. Data from the European Central Bank indicates that in French entities, the weight of national sovereign bonds is around 2.5% of total assets, compared to rates close to 10% in systems like the Greek or Italian. In terms of capital, Vontobel's boutique estimates that large French banks have an exposure to OATs of between 15% and 30% of their common equity tier 1 (CET1) capital.
Likewise, international diversification acts as a firewall for large banking. The three largest groups in the country (BNP Paribas, Société Générale, and Crédit Agricole) obtain more than half of their income outside of France and, in the case of BNP Paribas, only about a quarter of its revenue comes from the domestic market, where only about a third of its assets are also concentrated.
"This does not mean that the pressure on the business and retail sector will not contribute to the deterioration of the asset quality of these banking groups. However, the advantage of diversification for these large banking groups is real and the pillars of foreign income can provide stability when national sovereign debt faces tensions," emphasized Lichwa.
In parallel, the risk of a significant increase in non-performing loans (NPL) on bank balance sheets as a result of political uncertainty is tempered by growth forecasts. According to Bloomberg Consensus, French GDP is expected to advance by 0.5% in 2026, before rising to 0.9% and 1.1% in 2027 and 2028, respectively.
"There is some margin for these growth rates to decrease before we find ourselves immersed in a recessionary environment, which would normally be accompanied by an increase in NPLs. It is also worth noting that savings rates in France remain high, which should provide some cushion against the obstacles caused by political uncertainty," concluded the expert from TwentyFour AM.