France is mired in a government crisis closely linked to its high budget deficit. Investors are reacting nervously as the minority government of Prime Minister François Bayrou looms. The looming loss of confidence recently triggered a massive selloff in the financial markets. Both stocks and French bonds fell significantly, while risk premiums rose. This brings potential IMF aid to France into focus, as the French debt crisis could require international support if the deficit continues to rise. (thetimes: 26.08.25)
Opposition blocks Bayrou’s austerity plans despite budget deficit
Three major opposition parties announced they would not support the vote of confidence announced for September 8. Bayrou is planning sweeping cuts to reduce the budget deficit, but opposition dominates the debate. The leading CAC 40 index slid by over two percent, marking its lowest level in almost three weeks. Bank stocks such as BNP Paribas and Société Générale lost more than six percent, while mid-caps lost nearly three percent.
At the same time, yields on ten-year French bonds briefly rose to 3.53 percent before stabilizing at 3.50 percent. Higher yields mean falling prices and rising financing costs for the government. The spread to German Bunds reached 79 basis points – the highest level since April. This development demonstrates how closely the French debt crisis is intertwined with the government crisis in Paris.
Showdown in Parliament Exacerbates French Debt Crisis
If Bayrou loses the vote of confidence, his government faces collapse. President Emmanuel Macron would have to react: a transitional government, a new prime minister, or new elections are all conceivable. A leading analyst explained: “It looks as if Bayrou cannot stay. Macron is unlikely to impose a new prime minister without new elections.” This uncertainty is further fueling the government crisis in Paris.
Market strategists expect French bonds to come under further pressure. The risk of a victory for Marine Le Pen’s National Rally is particularly worrying investors. Many experts therefore see a growing risk that the French debt crisis will worsen without decisive reforms, making IMF aid for France more realistic.
Finance Minister Lombard Reassures
Finance Minister Éric Lombard recently attempted to regain confidence. He emphasized that he was “certainly not prepared to accept the failure of the minority government next month.” Nevertheless, he admitted that international support was conceivable. If France fails to stabilize its budget deficit, IMF aid for France could become necessary. Such statements demonstrate the close connection between politics and the financial situation.
The European outlook is also tense. While Germany is considered an anchor of stability, France is currently considered a source of uncertainty. Analysts see the French debt crisis as a risk for the entire eurozone, as investors could avoid French bonds.
Banks under particular pressure
Banks are particularly suffering from the government crisis in Paris. Their shares fell more sharply in the leading index than other sectors. The default protections of BNP Paribas and Société Générale also rose significantly in price. Banks react quickly to rising government deficits and rising yields on French bonds, as this increases their funding costs. A Morningstar expert warned: “Higher risk premiums lead to higher refinancing costs, which puts pressure on interest margins.”
In addition to rising costs, the bleak growth outlook is having a negative impact. The French debt crisis is impacting lending and weakening profitability. Banks are therefore under double pressure: higher funding costs and lower earnings.
Global context exacerbates risks
France’s weakness coincides with an already tense situation in global bond markets. Investors are concerned about the high levels of government debt in major economies and the discipline of their fiscal discipline. France’s budget deficit was recently at 5.8 percent of GDP, almost twice the EU target. Bayrou is trying to counteract this, but resistance in parliament is preventing any clear steps.
International analysts emphasize that European bonds have been heavily bought and that there is now room for selling. A strategist at State Street summed it up: “We are entering the budget debate. The French market activity reflects the fact that several countries are unwilling to limit their spending – France as well as the UK.” The French debt crisis therefore remains a key risk for investors.