France is experiencing a surge in borrowing costs, with 10-year yields reaching approximately 4.85% following recent civil unrest. This figure surpasses Italy's 4.52% yield, marking the sharpest increase among G7 nations. The spread between French and German 10-year yields has widened to 145 basis points, up from 85 basis points in early September.
The country's fiscal deficit is projected to hit 5.4% of GDP this year, exceeding the EU limit of 3%. Prime Minister Sébastien Lecornu aims to secure €54 billion in savings by 2027, though he currently lacks a parliamentary majority. Market analysts at Deutsche Bank highlight that the combination of a difficult fiscal environment and upcoming elections increases political risk.
French equity markets have reacted to the instability, with the CAC 40 index trading roughly 10% below its August peak. On Monday, the index fell below the 7,890 support level, with banking stocks including BNP Paribas, Crédit Agricole, and Société Générale declining by more than 2%. The next support level for the index is identified at 7,510.
The rising costs are impacting household finances, with average 20-year mortgage rates climbing to 3.66% in October from 3.17% earlier this year. Meanwhile, the euro has weakened to approximately $1.12. Corporate impacts include Carrefour reporting repair costs exceeding €10 million and the implementation of furlough schemes for some franchise staff.
Credit rating agencies are set to review France's sovereign debt status, with Moody’s scheduled for October 23 and S&P for November 27. France currently holds an Aa3 rating from Moody’s with a negative outlook. Further downgrades could potentially drive bond yields higher, creating additional pressure on the national economy ahead of the spring elections.
