ABN AMRO Euro Rates Watch - France’s Government Faces Collapse and Markets React

The announcement follows the failure among political parties to agree on the 2026 budget, which targets EUR 44 billion in government spending cuts to restore fiscal balance. Political opposition forces have been vocal in rejecting the proposed measures, yet they have offered limited viable alternatives. (see also our Fixed income outlook)

Initially, a no-confidence vote was planned to be proposed on September 23rd by the far-left opposition leader. However, the Prime Minister decided to bring forward this pivotal moment, seeking a final opportunity to sway opinion in his favour by emphasizing the financial risks posed by France's unsustainable debt trajectory. This manoeuvre is what we call "un coup de poker" (a gamble), as a majority of opposition parties have already declared their intent to vote against the government. This makes it highly probable that the government will collapse on September 8th.

The next question, then, is whether this will lead to new legislative elections or if President Macron will choose to appoint a new Prime Minister to form a new government. Based on Bayrou's remarks yesterday, the latter scenario appears more likely now, as Macron apparently suggested that dissolving parliament was not particularly effective in bringing political clarity and stability during the last attempt in June 2024.

What are the implications for financial markets?

The announcement has triggered a market correction in French assets. The OAT-Bund spread is currently trading at 77bp, compared to 70bp at last Friday’s close. As outlined in our previous outlook, this aligns with our expectations, as we had anticipated the government’s collapse due to the contentious 2026 budget negotiations. Accordingly, we had already priced in wider country spreads for Q3 and Q4 in light of this situation across EGBs and most particularly for France and Belgium with a spread of 85 and 70bp, respectively, by the end of the year.

Looking ahead, we expect the OAT-Bund spread to remain within the 75-80 bp range until September 8th, as the market adopts a "wait-and-see" approach. In the event of a government collapse, if President Macron appoints a new Prime Minister—likely from the centre-left this time—instead of calling for new legislative elections, we do not anticipate a further widening of the 10-year spread. In this scenario, the spread would likely trend back toward the 70 bp level. However, this assumption hinges on the expectation that a budget incorporating some degree of fiscal consolidation will be successfully adopted next year.

On the other hand, if it becomes clear that Macron intends to call for new elections following the government’s fall, spreads could rise sharply—potentially surpassing the levels observed during the June 2024 snap elections. This risk is heightened by the continued strength of populist parties in the polls, particularly the far-right party, well ahead in the most recent political survey. Meanwhile, the current centre coalition government ranks third, trailing behind the left-wing coalition. In such a scenario, the risk lies in the likelihood of substantially less fiscal consolidation than anticipated, which could, in turn, lead to a further credit rating downgrade for France.

A potential new round of elections would also likely have broader spillover effects across the eurozone, leading to a widening of spreads in other countries. Conversely, if a new government is formed without elections, the spillover effects are expected to remain contained by September 8th. (Sonia Renoult)