Investors are repricing French political risk ahead of an October budget and
next spring's presidential election. France's fiscal weakness is long-standing:
it has breached EU deficit rules more than 20 times and its debt-to-GDP ratio
has stayed above the EU limit since 2003. Ten-year OAT yields are near levels
seen in the 2009–12 euro sovereign crisis, but the market move of note is the
spread: the 10y OAT-Bund gap is about 87 bps, roughly 40 bps wider than the
post-Draghi (2012) average and versus a c.189 bps peak around 2011. ECB
backstops — OMT and the Transmission Protection Instrument (TPI) — exist but
remain unused; deploying them for a core member such as France would be
politically contentious, making France an awkward test case if spreads continue
to widen. A key vulnerability is the investor base: foreign holders account for
over 60% of French debt versus ~33% in Italy, and ABN AMRO estimates about 35%
of French bond holders are price-sensitive, meaning modest reductions in
marginal buyer demand could push yields higher without large-scale selling.
