France's debt problems will persist. Social unrest, a fragmented parliament, and the proximity of the 2027 elections hinder fiscal consolidation, which offers the only lasting solution, leaving OATs in a vulnerable position, especially in the long term. The precedent of Italy in 2018 shows that spreads can remain elevated until policy changes. Nevertheless, a 10-year OAT/Bund spread close to 160 basis points already reflects great caution.
In our base scenario, the budget is approved and national banks and asset managers return with caution, although insurers remain on the sidelines. This favours some compression of spreads, but a rebound in OATs is unlikely. Investors seeking exposure should focus on the short term and avoid the long term. Volatility should remain high until the 2027 elections. The tension is largely specific to France: the contagion effects to other eurozone bonds have diminished, with Belgium being the closest market and Italy the most affected, mainly in the medium term.
The key risk is a political stalemate that dilutes consolidation and leaves the deficit clearly above 5% of GDP, or disappointing growth. In that case, spreads would widen sharply and contagion would intensify. We do not expect an intervention from the ECB at this time, as only a credible fiscal adjustment can stabilise OATs in the long term.