France’s government faces collapse and markets react – ABN AMRO

Yesterday, French Prime Minister François Bayrou announced that a no-confidence vote will be held on September 8th. This comes in the wake of the ongoing political impasse, a phenomenon we have been highlighting for some time, ABN AMRO's Senior Fixed Income Strategist Sonia Renoult reports.

Broader spillover effects across the eurozone

"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. 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."