France Faces Rising Debt Costs Amid Political Struggles Over 2027 Budget

France is experiencing increasing borrowing costs as uncertainty mounts around the approval of its 2027 budget. Investors have pushed the yield on French 10-year government bonds, known as OATs, above 4.5 percent for the first time since 2008. As of Thursday, these yields stood at approximately 4.67 percent, signaling heightened risk perceptions in the debt market.

The spread between French and German 10-year bonds has widened to over one percentage point, a level not seen since the eurozone debt crisis reached its peak in 2012. This indicates that lenders require substantially higher returns to hold French debt compared to Germany’s, despite Italy and Greece traditionally being viewed as higher-risk borrowers. Within the Group of Seven (G7) advanced economies, France now faces some of the steepest government borrowing costs.

According to the French finance ministry, public debt is projected to reach a record 119.3 percent of gross domestic product in 2026, climbing further to an estimated 121.7 percent the following year. These figures underscore the fiscal challenges confronting France as it attempts to stabilize its finances amid a turbulent political environment.

The political landscape has been particularly fractious since the snap parliamentary elections in July 2024 failed to produce a clear majority. The National Assembly remains deeply divided, containing a mix of far-right National Rally members, the left-wing New Popular Front, and the center-right faction led by Prime Minister Sébastien Lecornu. This fragmentation has complicated efforts to pass budgets and maintain government stability.

Since the 2024 elections, two governments have fallen after no-confidence votes in December 2024 and September 2025. Lecornu managed to pass the 2026 budget only by invoking a constitutional provision that bypassed parliamentary approval, highlighting the difficulties in reaching consensus. The upcoming 2027 budget is expected to be even more contentious. Mujtaba Rahman, managing director for Europe at Eurasia Group, warned that the draft budget could topple the current government despite a general desire to avoid political upheaval ahead of the presidential election in spring 2027.

Key measures, including a partial freeze on pensions, are likely to face strong opposition from various parliamentary groups. Nevertheless, Lecornu appears intent on using his remaining time in office to implement fiscal reforms aimed at curbing the deficit and setting France on a more sustainable financial path. Discussions and negotiations with rival parties are anticipated in the coming weeks, but there remains the possibility that Lecornu will again use constitutional powers to enforce budget approval before the mid-December deadline.

Financial strategists at ING highlight the challenges France faces in reducing its budget deficit, which is forecasted to decline only slightly from 5.4 percent to near 5 percent. They also emphasize that political risks will persist beyond this year's budget as the focus shifts to the 2027 presidential election and the subsequent legislative elections. These events could lead to further instability and a difficult government formation process.

President Emmanuel Macron’s tenure has seen several centrist prime ministers who have struggled to secure lasting parliamentary support. The upcoming elections carry the potential for significant political shifts, possibly empowering parties from the extremes of the spectrum and complicating governance further. ING strategists predict that the difference in borrowing costs between French and German bonds, known as the OAT-Bund spread, will remain elevated between 100 and 125 basis points in the near term. The European Central Bank (ECB), currently focused on managing inflation, is unlikely to intervene with bond purchases to narrow this spread.

HSBC’s European rates strategist Chris Attfield noted that the increase in the OAT-Bund spread has surpassed what would normally be expected given France’s debt levels. He pointed out that more than half of French government bonds are now owned by foreign investors, raising concerns about the stability of this investor base. Should these holders reduce their positions, it remains unclear who would absorb the sales and at what yield.

Lars Machenil, CFO of BNP Paribas, emphasized the importance of crafting a sensible budget that addresses France’s debt concerns while allowing for necessary adjustments. Speaking to CNBC, he expressed cautious optimism that lawmakers are motivated to reach an agreement before deadlines expire. Machenil highlighted ongoing progress but acknowledged the uncertainties still surrounding the process.

France’s struggle to manage rising debt costs amid political gridlock exemplifies broader challenges faced by many European countries balancing fiscal responsibility with complex domestic politics. The outcome of the coming months will be pivotal, not only for France’s financial health but also for political stability as the nation approaches key elections.