Betting Against the Euro: What Could Threaten This Currency

By mid-October, speculators’ net short position in the euro had reached a 10-year high. This indicates increased bets on a weakening of the European currency. France’s debt problems have become one of the factors putting pressure on the euro. However, although the euro is trading near its lows for the year against the dollar, it has so far reacted relatively modestly to this crisis. What could pose a serious threat to the European currency? Elena Nefedova, head of the investment department at Astero Falcon, discusses this.

France retains access to the bond market and continues to service its debt. Last Friday, Moody’s affirmed the country’s Aa3 rating and maintained its negative outlook.

However, this does not allay investors’ concerns about whether the country’s authorities will be able to halt the rise in debt. The yield on 10-year French bonds exceeded 5% last week and stood just below that level on Monday, October 26. According to INSEE, by the end of the second quarter of 2026, the country’s public debt had reached €3.6 trillion, or 119% of GDP. The French Ministry of Finance forecasts a deficit of 5.4% of GDP in 2026 and 5% in 2027. Even such a reduction is causing controversy in parliament, and the upcoming presidential election is making it difficult to pass unpopular decisions.

France’s debt structure provides it with a form of temporary protection. Rising yields do not immediately affect debt servicing costs. According to Agence France Trésor, as of the end of September, medium- and long-term securities accounted for 92.5% of the central government’s market debt, with an average remaining maturity of 8.4 years. This structure allows the impact of high interest rates on the budget to be spread out over several years.

However, this protection will not last forever. France needs to continually raise new funds: the program for issuing medium- and long-term bonds totals €310 billion for 2026, and €340 billion is already planned for 2027. If yields remain high, debt service costs will gradually increase.

At the same time, due to weakening demand for the longest-term bonds, the French Ministry of Finance is considering a slight reduction in the maturities of new issues, although official placement plans have not yet changed. This will allow the government to borrow more cheaply in the short term, but it will lead to more frequent debt refinancing and increase the budget’s dependence on future interest rate changes.

Even if the 2027 budget is successfully adopted, this will not resolve the question of whether France will be able to keep its deficit under control in the coming years and restore investor confidence. Olivier Blanchard, former chief economist of the IMF, points to the lack of a reliable long-term mechanism that would stabilize the debt-to-GDP ratio. The market needs reasons to believe that budget commitments will remain in effect even after the next change in government.

France’s position in the European debt market has already changed. The yield on its 10-year bonds is now higher than Italy’s, even though Italy’s public debt stands at nearly 140% of GDP, compared with 119% in France. This shows that investors are assessing not only the size of the debt but also the government’s ability to keep the deficit in check.

The spread relative to German bond yields (which has narrowed to nearly 1.8 percentage points) cannot be explained solely by default risk: it has widened more than the cost of insuring against French defaults. Part of the premium, therefore, is linked to political uncertainty and the state of the bond market itself.

If tensions ease, this component could decline even without a rapid improvement in fiscal indicators.

A revaluation of French debt does not necessarily mean a revaluation of the euro. An investor can sell French bonds and buy German ones, thereby reducing portfolio risk without leaving the single currency. As long as funds are being reallocated among eurozone countries, the pressure falls primarily on bonds, not on the EUR/USD exchange rate.

However, the euro’s exchange rate is also influenced by how foreign investors assess the risks in their European portfolios. As long as concerns are primarily focused on French debt, the impact of foreign investors on the euro remains limited. But if they begin to doubt the prospects for European assets as a whole, they may start to reduce both their investments in the region and their positions in the currency itself (for example, by selling euros on the futures market).

A scenario in which the euro strengthens in the short term is also possible. Speculators’ positions, among other factors, also influence its fluctuations. According to CFTC data, by October 13, their net short position in euro futures had reached nearly 138,000 contracts, a 10-year high. This does not indicate a capital outflow from the eurozone, but it does show how widespread expectations of a decline in the exchange rate have become.

With such a large volume of bets against the euro, even moderately positive news could prompt traders to buy the currency to close out their short positions. Their purchases could accelerate the euro’s appreciation, triggering a so-called short squeeze. However, a large short position alone does not guarantee such a move.

A possible short-term rebound in the euro, however, will tell us little about the long-term consequences of the French crisis for the European market.

These, in turn, depend on whether the rise in the risk premium remains a French problem. Amid the sell-off of French bonds, yields on Belgian and Italian bonds have already risen. If investors simultaneously begin demanding higher yields from several countries, the consequences will extend beyond the French debt market.

Further increases in borrowing costs could spill over into the banking sector. Banks hold government bonds in their portfolios and use them as collateral. A decline in the prices of these securities does not in itself mean an immediate rise in loan rates. But if it also becomes more expensive for banks to raise funds, the additional costs may eventually be passed on to borrowers.

When this happens in several countries, opportunities for investment and consumption are reduced, and the growth outlook for the entire eurozone deteriorates. In such a case, international investors have reason to reduce their holdings of European assets in general, not just French bonds.

The energy factor further complicates the situation. The Eurozone imports energy resources, so rising oil prices simultaneously increase costs and hinder economic growth. In September, annual inflation reached 3.8%, according to Eurostat, with energy prices accounting for 1.7 percentage points of that increase. As a result, when making its decision on interest rates, the ECB will have to take several different factors into account: inflation, the deterioration in lending conditions, and the situation in the energy market.

What distinguishes the current eurozone from the crisis of the early 2010s is the presence of safety nets. In particular, the European Central Bank’s TPI instrument allows it to purchase countries’ bonds if excessive volatility disrupts the implementation of a single monetary policy. However, the regulator assesses a country’s debt sustainability and fiscal policy.

The excessive deficit procedure, under which France was subject from the second half of 2024 ( and which was suspended in the summer of 2026), does not automatically prohibit the use of the TPI, but it does make it more difficult to justify.

The ECB’s capabilities make it possible to mitigate the risk of market panic, but they do not eliminate disparities in the state of public finances. If yields remain high only in France, the main burden will fall on its budget.

French bond yields may remain higher than German ones for quite some time, even if the political situation in France stabilizes. However, this spread alone does not determine the dynamics of the EUR/USD exchange rate.

For the euro, the key question is whether investor mistrust will remain a problem confined to France or lead to a decline in investment in European assets as a whole. Whether the French debt crisis is escalating into a broader problem for the euro will be indicated by the dynamics of yields in other eurozone countries, the cost of bank financing, and the behavior of international investors.

This article was AI-translated and verified by a human editor