[Charlotte de Kerpoisson]:
France’s increasing political uncertainty is not only creating instability for the nation, but it’s also impacting the French bond market. In today’s podcast, we focus on France, the very particular political scene there, the nation’s mounting government debt, and the impact on financial markets and investors.
Hello and welcome. I’m Charlotte de Kerpoisson. French bond yields are rising due to escalating concerns over France’s economic growth and its debt sustainability. Today the French 10-year OAT, yields 0.85% more than the equivalent 10-year German bund. And it yields more than the equivalent Italian BTPs, for the first time since the eurozone was established in 1999. Meanwhile, French equities have also underperformed the broader eurozone this year, with the CAC 40 index edging up only 3%, versus plus 11% for the broad Euro STOXX 50 index. My guest today is Edmund Shing, Global Chief Investment Officer. Hello Edmund.
Edmund: Hello Charlotte
Speaker 1 So what are the main factors fuelling these concerns and driving up French bond yields?
[Edmund Shing]: Well, there's a general context, which is that bond yields, long-term bond yields, are going up pretty much all over the world. So that's the general background. However, there are three particular issues affecting France right now. Firstly, you have a French budget deficit which is wide over 5% of GDP, which has really remained wide over the last few years.
So the history is countries around the world indebted themselves heavily during the COVID pandemic of 2020 in order to support their local economies. Since then, most countries have reduced their budget deficits, i.e., their tax receipts versus government spending have come more in line since then. France is an exception to this, with a budget deficit this year projected to be still over 5% of GDP, which is pretty wide.
Secondly, we have weaker growth performance of the French economy versus the rest of the eurozone, particularly versus southern Europe, such as Spain, Italy, Portugal, and Greece. Thirdly, you've had a strong showing in recent 2027 preliminary presidential election polls, both of Marine Le Pen of the far right, the Rassemblement National, and Jean-Luc Mélenchon of the far left, La France Insoumise.
[Charlotte de Kerpoisson]: So let's address the factors fuelling concern in more detail, starting with the 2026 French budget deficit, which is projected at 5.1% of GDP, the highest among major eurozone countries except Belgium. Edmund, are you nervous about this fiscal deficit pressure?
[Edmund Shing]: Well, nervous might be the wrong word, but it certainly needs to be addressed. If you think about it, we talk about France's. France's economic position. On the one hand, you might argue the US is actually in a worse position than France. Why? Because the US is going to record a wider budget deficit this year on GDP. In other words, the gap between their tax receipts and their government spending is going to be even wider than France's 6.4% of GDP. France is projected as something just over 5%. Both are bad, but in fact, the US is worse.
Secondly, in terms of refinancing outstanding debt, France has an average maturity of debt of about 8 years. So, in other words, they need to refinance roughly one eighth of their total debt load every year. In the US, the average maturity is only 5 years. In other words, they have to refinance roughly 20% of their debt load every year. So, in fact, you might argue that the US in a more difficult position. Of course, what goes in favour of the US that it is the world's global reserve currency. If you think about the dollar and the predominant currency in the world, and it has very dynamic stock markets, so absorbs a lot of investment inflows from the rest of the world. As a result, France doesn't have those benefits. So, as a result of that, yes, I'm a little bit concerned. And moreover, the problem is that we don't really expect to see an improvement next year because even if we do get a budget passed for 2027, it's likely also to be targeting a budget deficit or a gap between tax receipts and spending over around 5%. So, not much of an improvement over this year.
[Charlotte de Kerpoisson]: The second cause for concern is France’s economic performance. France recorded -0.2% quarter on quarter GDP growth in Q1 2026, and 0% in Q2, well below the euro area’s +0.4% quarter on quarter growth for the same period.
How are financial markets reacting to this economic slowdown Edmund?
[Edmund Shing]: Well, they're not liking it because again, growth is important because if you want to grow tax receipts, you need to grow economic output. And then of course, as investment and consumption grow, then tax receipts will grow on employment on VAT on whatever you buy. So, tax receipts will grow. The problem is in France's case, it's not growing. Therefore, the tax receipts are not really growing, and that is the issue compared to other countries where you do have positive growth, the US being one example, southern Europe being another example, because they have positive growth. Their tax receipts are growing, and so it is perhaps less concerning for the financial markets in the short term. And you can see the result of this, as you mentioned yourself, you've seen a widening in the cost of debt for the French government versus the German government, which is the benchmark that we use in the eurozone. This was at below 0.7% percent difference and now is above 0.8%, moving towards a 0.9%, gap in funding costs. So clearly, French debt refinancing is getting more expensive, and that is a little bit concerning.
[Charlotte de Kerpoisson]: Let’s move on to the persistent political uncertainty in France and the impact on financial markets. Recent opinion polls for the next presidential election in France next year show Marine Le Pen of the far-right Rassemblement National party leading with 35 to 38% with Jean‑Luc Mélenchon of La France Insoumise, the far-left party, also in the top two. This scenario would leave no clear centrist contender for the election. Edmund are the markets overreacting to these opinion polls? The elections are 8 months away. So there’s still plenty of time for the electoral landscape to shift, particularly if a dominant centrist candidate were to emerge.
[Edmund Shing]: Yes, I think we should always take opinion polls with a big pinch of salt. So we should always not too slavishly follow any individual poll firstly. Secondly, point out there's 8 months to go before the first round of the presidential election, which will take place in April next year. Things can change. We can see we could see a consolidation or a rise of a particular centrist candidate above the others. So I still think there's plenty of time. So in the short term, I would argue that the markets, particularly the bond market, is probably overreacting to this particular opinion poll. I think many things can change between now and early next year, and so we shouldn't put too much emphasis on one particular poll.
[Charlotte de Kerpoisson]: Despite political, economic and fiscal instability in France, Fitch has maintained an A+ rating on French sovereign debt with a stable outlook, applauding the country’s large and diversified economy. Do you think France will get over the current hurdles and manage to preserve its credit rating? And secondly, what is your outlook for sovereign bonds in Europe’s second-largest economy?
[Edmund Shing]: I would say that again, one shouldn't be too pessimistic. There is there is of course concern, but on the other hand, again, France has been relatively resilient in the past. We do need to see a greater consolidation of the French budget in the future. That's for sure. That may have to wait until after the next French presidential election, but I do think that should be addressed, and it can be addressed. But I think it needs to be addressed potentially more via reducing spending as opposed to, for instance, increasing tax rates. What we need, what France really could do, with is incentives to improve growth on the one hand to get growth higher to improve those tax receipts, and secondly to reduce government spending, particularly in areas such as pensions, which is a very contentious area, I know, but which absorbs 24% of all French government spending, which is a huge amount, one quarter of the total French budget. If you compare French state pensions to other countries in the eurozone, they tend to be offering a higher percentage of salaries than in other countries. So, maybe it's a little bit too generous, and maybe France could do, again, reforming even a little bit more the French state pension system. And I think if that were to happen after the next presidential election, then the government can be in a good place to keep their level of debt relatively sustainable over the long term.
[Charlotte de Kerpoisson]: Edmund, thank you for getting us up to speed on the situation in France. So, in your conclusion, in your view, should investors rethink and readjust their portfolios at present?
[Edmund Shing]: Not really. I think one has a tendency to overreact to short term political concerns, but the medium-term outlook hasn't drastically changed, at least for now, in my view. So, you should not make any hasty adjustments to your investment portfolios, which, after all, are meant to be targeted at investment returns over the long term and not should not be subject to very tactical short-term changes.
[Charlotte de Kerpoisson]: Thank you, Edmund. And thank you to our audience for listening to this podcast. Please like, share, and subscribe to our weekly podcasts. To read our flash on today's topic and for all our investment strategy research. Please visit our website. Goodbye.