The French government yields: consequences for investors according to experts
9 SEPT, 2025
By Joanna Piwko from RankiaPro Europe
France is facing one of the most critical phases of its recent history after the fall of the government of François Bayrou, a centrist prime minister who remained in office for just nine months, who lost the vote of confidence in the National Assembly during a heated debate focused on the alarming state of public debt. Bayrou had tried to get a plan of cuts approved to face the gigantic amount of public debt, but he failed to find support, highlighting the political fragmentation and the widespread rejection of austerity measures. Now it is in the hands of President Emmanuel Macron to appoint a successor.
This event marks the second dismissal of an executive in the country in less than a year and reflects the deep institutional and financial crisis that grips the nation, trapped in a climate of political fragmentation and under international pressure for the high state indebtedness, which has already exceeded 114% of GDP.
Consequences for French finances
The political crisis explodes at a particularly delicate moment for national finance. The public debt of France stood at 3.346 trillion euros (114% of GDP) at the end of the first quarter of 2025, with a deficit of 5.8%, well above European parameters. The cost of debt and interest is skyrocketing: debt service already represents 7% of state expenditure and the yields of French bonds are at their highest since 2009, a sign of investor mistrust in the face of political and fiscal instability.
The French situation is viewed with concern in Europe: only Greece and Italy have higher debt levels within the Union, and the forecasts suggest that the debt/GDP ratio could approach 122% by 2030, unless drastic fiscal policy measures are adopted
Bayrou's attempts to impose cuts and tax increases did not have the necessary support, and now the absence of an adjustment plan threatens to further increase financing costs, in addition to the risk of a possible downgrade of France's credit quality, thus aggravating the problem.
Expert reactions
The fall of the government has had an impact on the markets: the French spread has shown some volatility and investors have adopted a cautious stance for fear of political stalemate and lack of immediate technical solutions. Experts warn that, without political consensus, it will be very difficult to reverse the rising debt trend and regain international confidence.
- Timothy Graf, head of Emea Macro Strategy at State Street Markets
Timothy Graf sees "the current volatility of French politics and the widening of the spread as a serious local problem", although he adds that it probably does not represent an existential and immediate issue for Europe.
"Institutional investor support for French assets has been weak over the past three months and we continue to see very weak flows on both equities and bonds in recent weeks", he says. Currently, investors hold an exposure in line with benchmarks - so there is room for an underweight in both asset classes if risk assessment requires it. Moreover, "the Eurozone is in a different policy position compared to the crisis years of the early 2010s and is better equipped to face these challenges".
As a result, State Street Markets does not foresee this situation translating into a weakness of the euro, as many competing currencies present similar policy challenges to those of France. However, French assets will continue to be unattractive in the short term.
- Raphaël Thuin, Head of Capital Markets Strategies at Tikehau Capital
According to Thuin, despite no party seeming able to reconcile the budget austerity program required by the markets, the risk of a massive budget drift appears limited since "a parliamentary majority remains committed to reducing the deficit, even though its concrete implementation is hindered by divisions among the parties."
In this context, the most likely scenario remains prolonged instability, even though "this situation should not cause a sudden economic shock. Despite its fragility, the fundamentals of the French economy remain resilient".
Thuin adds that the economic impact will be uneven: "the companies of the CAC 40 seem relatively protected from political turmoil and the rise in rates" given their limited exposure to public spending and the excess of private savings in France, which continues to finance part of the deficit. However, in the long term, political instability and chronic deficits could gradually erode investor confidence, the volume of private investments, and the attractiveness of the country.
Regarding the spread, according to Thuin, "it currently appears unattractive considering the political and budgetary tensions". The main channel of risk transmission remains the interest rate, in an international context marked by the general increase in financing costs. This dynamic is part of a global movement and France is not an isolated case, "but its political instability could worsen the position compared to more stable partners."
- Peter Goves, head of Sovereign Debt Analysis of Developed Markets at MFS Investment Management
According to Goves, the current political chaos in France is not a surprise, in fact "the spreads between French government bonds (OAT) and German Bunds had already increased in anticipation of this political risk".
"The spreads will likely remain wide, with brief phases of short covering, however political instability is certainly set to remain", he says, while adding that the situation is very fluid and the way events will unfold will likely determine the market tone in the coming days.
- Mitch Reznick, Head of Fixed Income in London at Federated Hermes Limited
Reznick notes that political uncertainty in France continues to weigh on markets. After Macron appointed Sébastien Lecornu as Prime Minister, protests under the banner “Bloqueemos todo” sought to paralyze the country. The government will be under pressure from both left and right to deliver results that suit them, he explains, adding that reversing fiscal expansion remains a significant challenge.
Looking ahead, Fitch could downgrade France’s rating on September 12. Yet bond markets have reacted calmly: the spread between French and German 10-year bonds is holding near 80 basis points. As Reznick concludes, On verra — it is hard to see French spreads widening much further in the short term, which could increase investment opportunities.
- Damian McIntyre, Senior Multi-Asset Portfolio Manager at Federated Hermes
McIntyre highlights the impact of the U.S. Bureau of Labor Statistics’ benchmark revision, which cut 911,000 jobs — the largest adjustment since the process began in 2000. He argues this confirms that the Federal Reserve should already have resumed its easing cycle.
Markets expect at least a 25 bps cut at next week’s FOMC meeting, with some chance of 50 bps. The Fed is in a difficult position and should reduce the target range for the federal funds rate by at least a quarter point, to 4.00–4.25%, McIntyre states, adding that futures markets anticipate at least one further cut this year.
Despite weaker labor data, McIntyre stresses that this week’s BLS report is not necessarily a bearish signal. Corporate earnings have been solid, retail sales strong, and job growth still positive. The U.S. economy is weakening, but this could be temporary — we believe it remains on track for further growth into 2026.
