France: here’s what lies behind the flight from Paris’s government bonds

It is highly likely that Moody’s will downgrade France’s sovereign rating today from the current Aa3 to A1. This downgrade has already been priced in by the markets and is one of the factors that have contributed to the sharp widening of the spread between German Bunds and OATs. Yesterday, this gap widened further to 177 basis points – a level not seen since 2011 – whilst the yield on ten-year French government bonds reached 5.142 per cent, the highest since 2002. However, comparisons in absolute terms with the Great Euro Crisis are not appropriate because the current French sovereign debt crisis is far more serious than that of the time: the widening of the spread on the two-year maturity yesterday sounded a serious alarm bell.

The 2,900 billion French government bonds currently in circulation – of which 2,700 billion are long-term and 200 billion are short-term – represent an increase of at least 1,000 billion compared with ten years ago: the figure stood at 1,650 in 2016, when Emmanuel Macron became president. OATs are now at the epicentre of European turmoil, because the markets regard them as an explosive mix, a concentration of multiple risks: high political risk due to the uncertainties surrounding the presidential elections and the spiralling anxiety and anger amongst the population; weak growth this year of around 0.5 per cent, with fragile forecasts of 1 per cent in 2027 – a figure that will not be achieved without a revival of competitiveness and far-reaching reforms; 340 billion in gross government bond issues next year, which must rely on the continued high proportion of non-resident investors – standing at 59.7 per cent of tradable government bonds at the end of September; interest rates, spreads and, consequently, the cost of debt refinancing are on the rise, with a negative impact on public finances – albeit with a delayed effect given the average maturity of government bonds of 8 years and 158 days; a debt-to-GDP ratio heading towards 120 per cent (it stood at around 70 per cent in 2011) and a deficit-to-GDP ratio of 5.3 per cent this year and perhaps 5 per cent in 2027; a trade deficit exceeding 70 billion euros. Meanwhile, the ECB continues to reduce the size of its balance sheet: the stock of French government bonds in the PSPP portfolio (the successor to QE) has fallen from 400 billion in December 2025 to 360 billion in September this year.

France has already been rated “A+” by S&P since October 2025 and by Fitch since September 2025. Their forthcoming reviews could focus on the outlook, changing it from “stable” to “negative” followed by a series of downgrades – following today’s downgrade by Moody’s, which JP Morgan economists predict has a “reasonable probability” of occurring – towards a strong triple “BBB” rating, where Italia currently stands. It is, in fact, this downward spiral that is causing concern in the markets. The sustainability of France’s public debt is not currently in question, but it could be called into doubt should the worst-case scenario materialise – a scenario that is, itself, far from improbable. Should Marine Le Pen of the Rassemblement National win, the fact that there are no precedents – that this presidency would be an entirely new development – will weigh heavily. Furthermore, should Le Pen fail to secure a majority in the National Assembly, this would lead to a deadlock on reforms and plans for fiscal consolidation and the restoration of public finances. Le Pen has made grand promises of net savings of 140 billion by 2032: she will have to prove she can deliver on them.

The schedule for French government bond issues is very light from today until the end of the year: by the end of September, 84 per cent of the net issuance programme had been completed (260 billion raised out of 300). This helps to avoid exacerbating market turbulence and to mitigate the impact of the ECB’s gradual quantitative tightening. The fact that French banks and insurance companies have sound balance sheets, are well capitalised and hold ‘only’ 10.5 per cent and 9.2 per cent respectively of French government bonds may, if necessary, act as a buffer to cushion the blow, in the event of heavy selling by non-resident investors and a safeguard such as the Transmission Protection Instrument (TPI), which remains in the ECB’s back pocket.