C’est reparti pour un tour… For the third time in fourteen months, a political gamble is bringing France on the brink of complete gridlock, and financial markets are increasingly worried. French Prime Minister Bayrou has called for a confidence vote in Parliament on 8 September in a bid to clear the way for the adoption of a budget law aiming at EUR 44billion of public spending cuts next year—but the “coup” appears to be lost already.

The Prime Minister doesn’t have a majority in Parliament and all opposition parties have immediately ruled out supporting François Bayrou’s government in this vote. In politic as everywhere else, “it ain’t over ‘til it’s over”, but the odds of a reversal and of a last-minute agreement with enough opposition MPs to secure the confidence vote appear very low. The probability of Bayrou being ousted from his PM position in 2025 has surged on Polymarket after the announcement of the vote, from 60% to almost 90%.

Unless a dramatic reversal of fortune for François Bayrou, the fourth French government in less than two years will have to resign following the 8 September vote. What comes next will be “déjà vu all over again”, another squaring-the-circle exercise for President Macron as in July and December last year: trying to form a government without a majority and with three incompatible blocks in Parliament that radically rule out compromise to govern in a coalition.

Alternatively, President Macron has the possibility to call for snap elections in the hope that a clear majority would eventually emerge in the Parliament. But it is far from granted that snap elections would result in a much different outcome than the ones of 2024 that led to the current gridlock in Parliament, and there is always the possibility that one of the radical left or right-wing parties would make an unexpected breakthrough and find itself in a position to govern for the first time.

Rating agencies are taking this situation into account. The three main agencies had already lowered France’s sovereign rating in 2023/24. With no improvement in public finances’ dynamic since then and lingering political uncertainty, the coming rating updates could lead to new rating downgrades, especially as S&P, Fitch and DBRS already have a Negative outlook on France’s sovereign rating. The next rating update from Fitch will be released on 12 September, a few days after the confidence vote, and will be followed by the DBRS update on 19 September. If the 8 September vote leads to the fall of the government, the political uncertainty could lead those two agencies to acknowledge a lower probability of significant improvement in public deficits in the short run, and to lower further France’s sovereign rating. Moody’s and S&P will update their rating later in the autumn, respectively on 24 October and 28 November.

The surprise announcement of a confidence vote on 8 September has suddenly raised back markets’ concerns around France’s public debt. Bayrou’s government had made the reduction of deficits a cornerstone of its policy, and its likely fall suddenly revives fear of persisting elevated deficits, should there be no leadership nor majority for adopting the 2026 budget in the coming months.

As a result, the OAT-Bund 10y spread has just spiked back toward the peaks reached a year ago. It jumped from 70bp to 82bp, close to the peak of 88bp hit in December last year. In the meantime, the 10y spread between French OATs and Italian BTPs has narrowed to its tightest level in over two decades, 5bp. Indeed, the evolution of the France-Germany spread has ran counter the broad European trend of sovereign spreads’ tightening since 2022. The combination of controlled public deficits in Southern economies, supported by solid economic growth, and prospects of large fiscal stimulus and higher debt in Germany has resulted in a convergence of European sovereign yields, mostly via the rise in German yields. Amid this trend, French yields have been an exception, rising in parallel or even faster than their German counterpart.

At current levels, French sovereign spreads are already pricing in a sovereign rating in the A bucket. In that respect, potential rating agency downgrades are already expected and reflected in OAT yields.

At this stage, the most likely scenario appears to be that PM Bayrou will lose the confidence vote on 8 September, leading to his resignation and the resignation of his government. President Macron will then have two options on the table: either try to find another Prime Minister that would have a better chance to gather support from the Parliament or call for snap elections with the hope that a viable majority will emerge and allow for the next government to pass the 2026 budget law.

The first option, a new Prime Minister with the same Parliament, is unlikely to lead to a different outcome than for the two previous governments. PM Barnier was forced to resign in December 2024 for opposition to his 2025 budget law. PM Bayrou faces the same fate on 8 September for opposition to his 2026 budget law. A new Prime Minister proposing similar public spending cuts than his predecessors would very likely face the same opposition from Parliament. Such option would probably lead to political gridlock, with the 2025 budget being extended into 2026 and no significant public deficit reduction.

The option of snap elections would significantly raise the level of uncertainty for markets. Elections are unpredictable, especially in such context. They could deliver a similar outcome than the ones of summer 2024, with a paralysed Parliament made of three incompatible blocks. Snap elections could also give a stronger hand and possibly a majority to one of the three blocks, adding even more uncertainty around the fiscal policy outlook.

The probability of a truly favourable outcome for France’s sovereign bond market therefore appears remote. Polls suggest no appetite from French voters to support a government ready to reduce public spendings. In this context, the “least bad” scenario appears to be one where the current dire situation is not made even worse by the aftermaths of the 8 September vote, with a continuation of the current political gridlock preventing any change in fiscal policy one way or the other.

In such scenario, the OAT-Bund 10y spread could stabilise around its current level of 80bp, a level already in line with France’s rating being downgraded to A+/A1 and with the debt/GDP ratio level of Europe’s second largest economy. In a context of ample fiscal stimulus and surging public debt across all large economies including Germany, French government bonds would therefore evolve in line with their European peers in the coming months.

However, risks are tilted to the downside for French government bonds. The longer the gridlock persists, and France is unable to reign on her public spendings, the more investors will become warry of French public debt sustainability. The political and social situation implies that any election—whether potential snap elections in the coming weeks, local elections due in Spring 2026 or Presidential election in 2027—has the potential to create even more uncertainty around the public debt outlook. This could lead to a further widening in the France-Germany spread and an underperformance of French sovereign bonds compared to their European peers.

There have been words of an ECB or IMF intervention to help France stabilise its public debt dynamic and financing costs. However, at this stage, both appear highly unlikely. The ECB will only grant support to France’s debt market if there is a credible plan of fiscal consolidation in place. The central bank is highly unlikely to provide monetary policy support as long as fiscal policy is out of control. Regarding a potential intervention of the IMF, it should be considered as a “last resort” emergency option that will be activated only if France is on the brink of collapse. France is not there yet and still has some room before it hits a debt crisis.

France’s issue is that it is on a trajectory leading toward a public debt crisis in a somewhat distant future, but that it is unable to do what would be required now to alter this trajectory and make it sustainable. The longer current deficit levels persist and political gridlock lasts, the closer France gets from a public debt crisis on markets. It may not take that much to improve the dynamic and reassure investors, at least temporarily—but such a hypothesis cannot be taken for granted. The French sovereign bond market has already adjusted and already appears to price correctly the situation today. Credit spreads for French financial and non-financial issuers have also adjusted. Another deterioration in sovereign and credit spreads would likely require some new unexpected negative developments on the political front. In the meantime, French bonds should be looked at with cautiousness and selectivity.