How can we tell if the France's crisis ha spread to other countries? Analyst explain

The debt crisis in France is putting pressure on banks and the euro exchange rate, but it has not yet escalated into a systemic problem for the eurozone. What should investors watch for next?

Yields on long-term bonds are rising worldwide, and it has hit the weakest links, including France. The economic growth here is is underperforming, fiscal dynamics are deteriorating, and political fragmentation is limiting the scope for corrective action, let alone structural reforms. Frederik Ducrozet, Head of Strategy and Macroeconomic Research at Pictet Wealth Management, shared this view with Oninvest.

French government bonds have experienced a “sharp” sell-off in recent weeks, as the Financial Times puts it. Yields on 10-year bonds reached nearly 5%—the highest level in nearly a quarter-century. They have underperformed all other G10 bonds since the start of the year, according to Bloomberg.

The yield spread between French and German 10-year bonds—a key indicator of the market’s perception of risk—has risen sharply in a short period of time and is now approaching the levels seen during the eurozone debt crisis. In early October, this spread stood at 1.59 percentage points. The sell-off in French bonds also led to a weakening of the euro. On October 6, it fell to its lowest level since May 2025, as investors feared that the current market turmoil would spread beyond France to other countries.

The sell-off was triggered by a combination of several factors. In France, protests continue among high school students and public sector workers who are opposing spending cuts.

At the same time, French Prime Minister Sébastien Lecornu presented a draft budget for 2027 in early October that includes measures to reduce the budget deficit, including a cap on pension indexation and a partial freeze on civil servant salaries. France’s national debt has already reached €3.5 trillion, or nearly 120% of GDP, which significantly exceeds the eurozone average. The cost of servicing this debt has become the country’s largest budget expenditure item, surpassing spending on education and defense.

The draft budget is facing fierce opposition from lawmakers aligned with the opposition, which could lead to the resignation of the cabinet. And the upcoming presidential election creates yet another source of uncertainty. Polls show that Marine Le Pen, the far-right leader, and Jean-Luc Mélenchon, the far-left leader, will face off in the second round.

Frederik Ducrozet notes that the catalysts for the sharp sell-off are not entirely clear yet: France’s problems are not new. Analysts at Deutsche Bank essentially agree with him: the French budget announcement was in line with expectations, and broader political signals from both the centrists and the right-wing forces in France continue to indicate recognition of the need for significant cuts in budget spending, they wrote in a note dated October 2.

The widening yield spread between French and German government bonds has also negatively impacted the attractiveness of French stocks, Bloomberg notes. The financial sector, in particular, has become less attractive. In a research note dated October 5, AlphaValue notes that since mid-August, Crédit Agricole shares have lost approximately 18%, while Société Générale shares have fallen 24% from their previous highs.

The stock prices of companies focused primarily on the domestic market—particularly those in the infrastructure and real estate sectors—also declined.

However, according to JPMorgan, the negative impact of the current widening of spreads between French and German government bonds on banks remains very small for now: even with a 100-basis-point widening of the spread, the decline in their Common Equity Tier 1 (CET1) ratio is less than 4 basis points. For BNP Paribas and Crédit Agricole, the decline was about 4 basis points due to the recent sell-off, while for Société Générale, it was about 1 basis point.

Analysts at JPMorgan attribute this limited impact to the fact that banks’ sovereign portfolios are diversified, interest rate risk is hedged, and a significant portion of the bonds is carried at amortized cost. The French market accounts for about a quarter of BNP Paribas’s revenue, 40% of Société Générale’s revenue, and nearly half of Crédit Agricole’s revenue. France also accounts for 30%, 40%, and 58% of their loan portfolios, respectively.

JPMorgan expects government bond yields to rise further and spreads against German bonds to widen, which will result in tighter financial conditions for companies and households. This will also lead to a potential decline in French banks’ profits—for them, every 10-basis-point increase in the cost of risk (i.e., loan loss provisions) will reduce profits by 1–2% in 2027.

According to his forecasts, the most likely scenario for France is a prolonged period of political bargaining, partial fiscal measures and a structurally higher risk premium.

He advises investors to watch the French spreads and OAT auctions for liquidity risks, but also Italian spreads including at shorter maturities for signs of contagion.

In a note dated October 2, Deutsche Bank notes that the ECB has the TPI tool to protect the eurozone from sharp and unwarranted market movements. However, it remains unclear at what point the regulator will decide to intervene and which countries’ markets it will support. According to the bank’s assessment, France could theoretically meet the conditions for the application of the TPI. The mechanism provides for oversight of budgetary discipline and, for France, would mean that its budgets would need to be approved by the European Commission.