A protester holds a placard reading "raise wages" during a rally as part of a day of nationwide public sector strikes and demonstrations, at the Place de la Bastille in Paris, on September 29, 2026.
The outlook for French finances looks increasingly bleak.
French Prime Minister Sebastien Lecomu on Thursday was unveiling the country's draft budget that he will try to push through a fractured parliament. The French budget deficit is projected to reach 5.4% of GDP this year - one of the largest deficits in the European Union and well ahead of the region's 3% rules. Inflation is a problem as well, up 3% year-on-year in September.
No deficit-cutting white horse is on the horizon, as polling shows the top two candidates to be the next French president are the far-right's Marine Le Pen and the far-left's Jean-Luc Melenchon. And the European Central Bank is not allowed to buy French bonds, under current rules, though it probably would be possible to put something together in the direst of scenarios.
Put it altogether, and bond traders have, and it doesn't look good. There is little appetite for OATs, which stands for Obligations Assimilables du Tresor and don't look desirable in any language. France's 10-year OAT yield BX:TMBMKFR-10Y reached the highest level since 2002, and the yield differential to Germany's BX:TMBMKDE-10Y 10-year equivalent is now over 130 basis points. Economists at Nomura say the European Central Bank would be unlikely to act even if the spread between France and Germany reached 200 basis points.
The Spanish economist and author Daniel Lacalle, in a recent conversation with MarketWatch, says France - along with the U.K. and Japan - are the countries whose financial troubles could spill across the borders.
"Fiscal policy is not about who wins," he said. "Fiscal policy is about who loses first."
He diagnosed France's fiscal problem quite simply - an inability to grow the economy. After growing 1.8% in 2023, French GDP slowed to 1.4% in 2024, to 0.9% in 2025, and is projected to grow just 0.5% this year, according to FactSet.
"The problem that we have lived with since 2008, in particular, is that countries saw what the United States did in 2008 with the financial crisis and said, 'oh, I like that. I'm going to copy what the United States is doing.' But you're copying it without having the world reserve currency, without having the legal and investor security, the depth and the breadth of the market that the United States has," said Lacalle.
But, to a U.S. investor, invested in an S&P 500 exchange-traded fund, what's the risk?
"If France is falling apart, if Germany is going down the same route as France did 20 years ago, and if the United States does not solve its fiscal situation, then you have a problem which is that the multiples that you're paying for the companies that are embedded in the S&P 500 ETF are probably way too expensive for the type of growth in the economy, consumption and investment that are going to come," Lacalle replied.
He said the backdrop of seeing all the world's developed bond markets selling off simultaneously was troubling.
"Historically, when people were selling U.S. bonds, the alternative was to buy German bonds, as the safest asset. That is not what is happening now."
"What is happening is that you're seeing the bond yields of Germany, France, Japan, the U.K., the United States all going up in unison, and the United States is not even the worst performer in terms of those bond yields rising," he added.
France along with Germany is the cornerstone of the euro area, and the euro is the only other reserve currency in the world after the dollar, he noted.
-Barbara Kollmeyer -Steve Goldstein