Key facts
- French 10-year borrowing costs are about 150 basis points higher than German equivalents.
- French 5-year credit default swaps are trading at 87 basis points.
- The euro has fallen below $1.13, its weakest level in 18 months.
- France's stock market is down nearly 4% this year, lagging European markets.
- BNP Paribas shares are up 13.3% in 2026, below earlier highs.
French markets are facing mounting pressure from concerns over high debt levels and political uncertainty, with the upcoming presidential election adding to investor worries. The government is seeking €54 billion in savings for its 2027 budget proposal.
The risk premium on French debt, measured by the gap between French and German 10-year borrowing costs, has surged to around 150 basis points, its highest level since the 2012 euro zone crisis. This rapid increase in the risk premium has surprised markets, with the speed of the move not seen since 2011. While the European Central Bank has the capacity to intervene, analysts believe it is unlikely to be necessary for France at this time. Marion Le Morhedec, CIO of fixed income at Fidelity, noted that the market is testing the political situation regarding the budget.
France's stock market has underperformed broader European markets, down nearly 4% this year compared to a 6% rise in Europe. The Bank of France forecasts economic growth of just 0.4% this year, a slowdown from 0.9% in 2025. Domestic banks have struggled in this environment, with Credit Agricole shares down 3.8% and Societe Generale down nearly 4% this year, although BNP Paribas shares are up 13.3% in 2026 but below earlier highs. The broader European STOXX banking index is up 14% in 2026.
Credit default swaps for French sovereign debt have also risen sharply, with 5-year CDS trading around 87 basis points, the highest since early 2013. This indicates a significant increase in the cost of insuring against default risk, nearly tripling in one month. In contrast, Italian CDS have risen by 50 basis points over the last three months, while German, US, and UK CDS have seen little change.
The euro has weakened below $1.13 against the dollar, reflecting heightened investor unease and potentially exacerbating fiscal problems by increasing the cost of imports. This situation has led traders to anticipate at least two interest rate hikes from the ECB in the coming year, with a 50/50 chance of a third. Some ECB policymakers, however, have cautioned against aggressive rate hike expectations, with strategists at Monex expressing skepticism about the ECB sustaining the deposit rate materially above 3% given growth headwinds and French sovereign stress.