The continuous rise in State financing conditions in France has set off alarms among large investment managers, who see the French Executive's margin of action seriously compromised. At the same time, analysts are already warning that the pressure on sovereign credit is beginning to transfer risks to the country's banking sector, threatening the stability of the entities' balance sheets given their exposure, although contained, to state debt.
To the widespread concern about a debt crisis at the international level, in the French country, internal political risk and a general wave of sales of State bonds during this week are added as catalysts that push up, even more, the yields of the nation's sovereign fixed income.
In figures, the interest rate on the 10-year State bond (OAT, for its French acronym) has reached 4.99%. Although the French country's bonds have not yet been able to surpass the psychological barrier of 5%, the yield is at its highest level since 2002. Consequently, the spread between the OAT and the German Bund has risen to around 150 basis points. "The technical outlook does not lead us to believe that we have yet reached a ceiling. In fact, we consider that several politicians are guilty of adding fuel to the fire with various irresponsible comments, and the environment is such that, unfortunately, there is a lack of judgment on the part of those in leadership positions or those who aspire to them," argued TwentyFour AM portfolio manager (Vontobel boutique), Jakub Lichwa, in a recent study.
Such is the situation that, in recent statements, the governor of the Bank of France, Emmanuel Moulin, even admitted that France's fiscal situation is "very complex", although he ruled out intervention by the European Central Bank (ECB) arguing that the Government can act by approving a budget and committing to guarantee that it does not exceed a deficit of 5%. “France should not look for solutions in Frankfurt, the solutions are at home,” Moulin ended up defending.
It is not an opinion shared by the main analysis firms, which identify a host of factors as the true risk. Thus, the chief economist of Ostrum AM (Natixis IM), Philippe Waechter, advanced in a recent study that income stagnation, energy inflation, high interest rates and the exhaustion of budgetary margin have left the French economy “without a safety net.”
Thus, the country's main macroeconomic indicators already show some deterioration and, what is worse, none have "margin of flexibility to adjust", according to Waechter, who, faced with new disturbances such as higher increases in interest rates or a sustained escalation in the cost of living, fears "greater destabilizing effects" for the economy than a simple slowdown.
"In an economy that has fiscal and financial reserves, the effects of a shock are transmitted gradually and can be absorbed over time. Today this is no longer the case. The coincidence of multiple imbalances and the succession of shocks leave the economy without engines of growth, while eroding its capacity to adapt and its flexibility to make the necessary adjustments," stressed the chief economist of Ostrum AM.
Along the same lines, his counterpart at Allianz Global Investors, Sean Shepley, has advanced that for new investors to be willing to finance the French State, it is necessary to offer not only attractive profitability, but also credible signals of fiscal discipline, although he has warned that "electoral commitments and their subsequent execution do not always go hand in hand", in reference to the promises that candidates profess during the electoral campaign.
In parallel, the damage is already affecting the financial sector. Over the past five business days, French banks have performed worse than their European peers, both in equities and credit. Thus, BNP Paribas has lost 2.4% in the week; Credit Agricole; 3.7% and Société Générale around 5%.
On the business side, higher yields on government bonds tend to be less favorable for French banks as they tend to hold long-duration assets (such as mortgages) financed by deposits, creating a real risk of margin squeezes. Furthermore, for managers, the current instability increases the risk that rating agencies will lower the rating of sovereign debt, which could extend to the banking sector as they own part of that liability and raise financing costs. “The sector would be less competitive globally and would limit the granting of credit,” portfolio manager TwentyFour AM has advanced as one of the probable consequences.
In turn, given the high budget deficits, analysis houses fear new taxes on sectors with prolonged growth such as banking or increases in existing ones as a measure to compensate for the deterioration of public accounts, which would weigh on the entities' profits.
In favor of the French banks, the factor plays that they are not large holders of the State bonds of their own country. According to data from the European Central Bank, in French financial institutions the weight of the country's liabilities represents around 2.5% of its total assets, while in countries such as Greece and Italy the proportion rises to the 10% threshold. In figures, the Vontobel boutique estimates that the main French banks have an exposure to OATs ranging between 15% and 30% of their common equity tier 1 (CET1).
On the other hand, globalization acts as a shield for international banking. In fact, the three large French banks (BNP Paribas, Société Générale and Crédit Agricole) generate more than 50% of their income outside France and in the specific case of the former, only a quarter of its income is generated in the French country and only a third of its assets are located there.
"This is not to say that the pressure on the corporate and retail sector will not contribute to the deterioration of the asset quality of these banking groups. However, the advantage of diversification for these large banking groups is real and foreign income pillars can provide stability when national sovereign debt faces stress," Lichwa emphasized.
In parallel, the real risk of an increase in non-performing loans (NPLs) on banks' balance sheets due to political turmoil is diluted by growth estimates for the country. According to data from Bloomberg Consensus, French GDP is still expected to increase by 0.5% in 2026, before recovering to 0.9% and 1.1% in 2027 and 2028, respectively.
"There is some room for these growth rates to reduce before we find ourselves immersed in a recessionary environment, which would normally be accompanied by an increase in NPLs. It is also worth noting that savings rates in France remain high, which should provide some cushion against the obstacles caused by political uncertainty," concluded the TwentyFour AM expert.
