France’s 2027 Budget Threatens Government Stability as Bond Yields Spike

Key points

• The yield on French 10-year government bonds (OATs) exceeded 4.5% for the first time since 2008, trading at 4.6696% on Thursday.
• The spread between French and German 10-year bond yields has widened by more than 100 basis points, a level not seen since the 2012 eurozone sovereign debt crisis.
• Prime Minister Sébastien Lecornu plans to submit a draft 2027 budget in early October, aiming for 54 billion euros in spending cuts to reduce the deficit.
• The French finance ministry projects national debt will reach a record 119.3% of GDP in 2026 and 121.7% in 2027.
• Previous governments were ousted via no-confidence votes in December 2024 and September 2025 due to budget disputes.
• Lecornu may use constitutional powers to bypass parliament if the budget fails to pass by the mid-December deadline.

Background

France has faced repeated fiscal crises since the July 2024 snap election failed to produce a parliamentary majority. The current government, led by Lecornu, only managed to pass the 2026 budget in February 2026 using special constitutional provisions. This instability follows a pattern of political fragmentation involving the far-right National Rally, the left-wing New Popular Front, and center-right groups. The situation is exacerbated by a previous credit rating downgrade by Fitch and rising borrowing costs across the G7.

How outlets are covering it

CNBC highlights the immediate market panic, noting that France now pays a higher risk premium than Italy or Greece, and that non-domestic ownership of French bonds exceeds 50%, creating volatility risks. ING strategists argue that time is not in favor of French bonds, predicting the OAT-Bund spread will widen to 100-125 basis points as political uncertainty mounts ahead of presidential elections. Le Monde focuses on the internal contradiction of the budget, noting that despite Lecornu’s rhetoric of 'tax stability,' the draft bill actually mandates tax increases to address the deficit. HSBC’s Chris Attfield suggests the ECB is unlikely to intervene unless market moves become 'disorderly,' while BNP Paribas’ CFO expresses cautious optimism that lawmakers will find a way to pass the budget.

Why it matters

The instability of France’s budget process threatens the stability of the eurozone. A collapse of the French government could trigger a broader sovereign debt crisis, as investors demand higher yields for lending to France. The widening gap between French and German borrowing costs signals a loss of confidence in French fiscal policy, which could impact European energy costs and EU solidarity. If the budget fails to pass, it could lead to a third consecutive government ouster, creating a political vacuum before the 2027 presidential election.

What to watch

The French government will submit the draft 2027 budget to parliament in early October, with a final vote scheduled for November 17. If the budget fails to pass, Lecornu may invoke constitutional powers to bypass parliament by mid-December. Investors will watch the OAT-Bund spread closely, with ING forecasting it could reach 125 basis points. The European Central Bank may be forced to intervene if market volatility becomes 'disorderly,' though it is currently focused on inflation.