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France is heading towards a government crisis: Prime Minister François Bayrou will seek a vote of confidence on 8 September. His political survival is considered unlikely. Are snap elections, a general strike and fresh turbulence on the financial markets now looming? “Investors holding French securities could be in for difficult times,” says Thorsten Fischer, Managing Director and Head of Portfolio Management at Moventum AM.

France’s Prime Minister Bayrou is under enormous pressure. On 8 September he intends to put the question of confidence before parliament – a high-risk move that will determine his political future. “The government’s chances of survival are about as great as the French enthusiasm for losing public holidays,” comments Fischer. As the government heads for collapse, public protest is already building.

France’s fundamental problem lies in its debt burden. Public debt already stands at 114 per cent of GDP. Within the EU, only Italy and Greece are more heavily indebted. France also recently topped the EU rankings for its budget deficit: 5.8 per cent of GDP, far above the EU threshold. Faced with further foreseeable spending – not least on defence – Bayrou pulled the emergency brake. His €44 billion austerity package, worth 1.5 per cent of French GDP, has met with fierce resistance. The opposition and trade unions are mobilising; instead of support, frustration is mounting.

For President Emmanuel Macron, Bayrou’s possible defeat carries explosive potential. Should the Prime Minister fall, Macron would be left with little option but to dissolve the National Assembly. Yet new elections promise no easy way out: polls suggest that political fragmentation would persist, leaving stable majorities out of reach. “For the reforms that are urgently needed, this would mean paralysis for an indefinite period,” says Fischer. “France remains in the fiscal waiting room.”

The turbulence is spilling over into the financial markets. French government bonds (OATs) have seen their yield spread over German Bunds widen significantly – from 65 to 77 basis points. Italy and Spain followed suit with their own spreads. “After such a rapid increase, there could be a brief period of calm,” notes Fischer. “Markets do like to pause for breath.” But should Bayrou fall, uncertainty would grow once again. Political deadlock would mean higher risk premiums.

Here, the market dynamics around former Prime Minister Barnier’s confidence vote in the fourth quarter of 2024 may serve as a blueprint: ahead of the vote, the French stock market fell back by as much as five per cent. On the bond market, the risk premium on 10-year French OATs over German Bunds rose to around 90 bp. After the vote itself, there was an initial stabilisation, followed by renewed uncertainty and volatility triggered by political instability. “A similar sequence must currently be regarded as the possible ‘best-case scenario’ for the upcoming vote of confidence,” Fischer explains.

Either way: “French government bonds will remain subject to heightened volatility for the time being,” Fischer concludes. Those invested in OATs must be prepared for choppy price movements. Political events are back as price drivers – and are likely to keep risk spreads elevated for some time to come. “From today’s perspective, there is little sign of relief on the horizon.”