Macroeconomic forecasting consultancy TS Lombard suggests that the yield spread (OAT-Bund) between French and German 10-year government bonds may not have peaked yet. With the French presidential election approaching in April 2027, fiscal and political risk premiums still have room to rise, and the spread will widen further to over 100 basis points.
France's fiscal problems this year may be more intractable than in the past two years. The French fiscal deficit is expected to exceed 5% of GDP again, and without corrective measures, it could widen by about 0.5 percentage points to close to 6%. Since the presidential election itself revolves around fiscal policy, the political incentive for parties to reach a budget agreement has decreased, thus significantly increasing the risk that France will not have a formal budget until the third quarter of 2027.
Previously, all parties wanted to avoid another snap election before 2027, and therefore ultimately compromised. However, with the presidential election approaching, refusing to compromise may actually be more electorally advantageous. However, this is not expected to evolve into a fiscal crisis in the short term, nor is it expected to prompt the European Central Bank to restart its TPI transmission protection mechanism (a bond-buying tool). A real intervention by the European Central Bank might require simultaneously observing a rapid widening of interest rate spreads, reaching an absolute level of approximately 150-200 basis points, and spillover effects onto other Eurozone government bonds.
