Markets Remain Tense Following Sébastien Lecornu's Speech
Following the Prime Minister's speech, the CAC 40 continues its decline, and French government bonds remain under pressure. While public finance concerns worry investors, France is also feeling the impact of rising European bond yields and increasing oil prices. Behind these movements lies a question about the government's ability to stay on its budgetary course. On Thursday, October 8, the Paris Stock Exchange shows no signs of easing. In the morning, the CAC 40 drops about 1%, having already lost 1.22% on Wednesday, closing at 7,769.21 points. The movement extends well beyond French borders. The European Stoxx 600 index falls by 0.8%, with banking stocks among the hardest hit, experiencing a sector-wide decline of nearly 2%. Investors are reducing their exposure to assets deemed most sensitive to rising interest rates and the economic slowdown. The session occurs a day after Sébastien Lecornu's televised address. From Matignon, the Prime Minister defended his 2027 budget plan, reaffirming his commitment to reduce the public deficit to 5% of the gross domestic product (GDP), compared to an expected 5.4% this year. The government's recovery effort amounts to 54 billion euros, a significant figure that will depend largely on parliamentary negotiations. Should the market's reaction be seen as a rejection of his speech? The conclusion might be tempting but would be overly simplistic. The CAC 40 had started its decline before the speech, which was delivered after Wednesday's close. More importantly, the current tensions are not exclusively French. They reflect a combination of economic, financial, and political factors whose effects are intensifying.
French Debt at the Heart of Concerns
On the bond market, the French situation is particularly drawing attention. The yield on French government bonds (OAT), which determines the conditions under which the state borrows in the markets, has sharply increased in recent weeks. At the beginning of October, the yield on the ten-year French bond had reached approximately 4.9%, while the gap with its German equivalent had significantly widened.
This gap, known as the spread, is an indicator of the additional compensation demanded by investors to hold French debt rather than German debt. Its widening reflects a relative deterioration in France’s financing conditions. However, it does not alone indicate an immediate risk of default.
The budgetary issue is not new. France's public deficit, which was 5.1% of GDP in 2025, is expected to reach 5.4% in 2026, while the government had initially hoped to bring it down to 5%. The 2027 budget plan now aims to return to this threshold next year.
Thus, the recovery path has been postponed.
Adding to this difficulty is the cost of debt. According to forecasts presented in the budget plan, its burden would reach 91.2 billion euros in 2027, compared to 62.6 billion in 2026. The rise in bond yields is all the more concerning as it can gradually increase the state's refinancing costs, even if its effect on the actual interest paid is not immediate.
For investors, the question goes beyond just the amount of announced savings. It also concerns their composition, economic consequences, and effective implementation.
A Budget to Pass in a Divided Parliament
Sébastien Lecornu's speech also highlighted a challenge that the markets are particularly attentive to. The Prime Minister does not have a parliamentary majority allowing him to adopt his budget without negotiations. However, reducing the deficit involves decisions that directly affect businesses, households, and public spending. The initial discussions give an idea of the obstacles to overcome. On Wednesday, October 7, deputies meeting in committee rejected a measure to cap the tax benefit from the 10% deduction on retirement pensions at 3,000 euros, down from the current 4,439 euros. The government expected 1.4 billion euros in additional revenue from this measure. The committee's rejection does not mean this provision will be definitively abandoned, but it reveals the challenges already faced by some measures in the finance bill. The margin for negotiation is all the more delicate because budgetary choices can have different impacts on the economy. A reduction in public spending helps contain the deficit but can also weigh on economic activity depending on the areas affected and the pace of adjustments. Conversely, a recovery that is too slow exposes the State to continued debt, increasing interest charges, and maintaining a high risk premium. The debate is therefore not merely about the opposition between austerity and stimulus. It also concerns the nature of the savings considered, the expected revenues, and the ability of measures to produce the announced results without further weakening growth. It is precisely on this ground that the government's statements must still be confronted with parliamentary decisions.
Oil and European Rates Further Complicate the Equation
French difficulties are also taking place in a significantly worsening international environment. This Thursday, oil prices are rising by more than 3% due to concerns over energy supply in the Middle East. This new surge in prices revives inflationary expectations and contributes to the increase in bond yields across Europe.
This mechanism is unfavorable to public finances. When investors anticipate sustained higher inflation, they may demand higher bond yields. The rise in rates does not affect only France, but the most indebted countries may face additional pressure as investors reassess the risks associated with their public finances.
The movements observed this Thursday involve several countries, including Italy and Greece. German bonds, on the other hand, maintain their role as a benchmark among eurozone sovereign debts. Reuters notes a portfolio reallocation movement towards securities deemed the safest, at the expense of the debts of some more heavily indebted countries.
France thus faces two distinct challenges. The first is internal, linked to the deficit and political uncertainties surrounding the budget. The second is external, caused by international energy and financial tensions. It would be difficult to precisely attribute the share of Thursday's market decline to each of these factors.
This distinction is important for correctly interpreting investor reactions. A decline in the CAC 40, shared by other European markets, does not necessarily constitute a sanction of French economic policy. On the other hand, a sustained widening of the OAT-Bund spread, especially if it occurs independently of other European debts, would provide a more specific signal about the evolution of the perception of French risk.
At this stage, the Prime Minister's speech has not led to a marked easing of the markets. Nor has it alone caused the tensions observed over several sessions. Investors now have a specific budgetary target, but they still face two uncertainties: the conditions under which Parliament will accept the proposed measures and the evolution of an international environment that could quickly alter economic forecasts. It is less about the repetition of budgetary commitments than about their translation into legal texts, and then into public accounts, which will enable the assessment of the credibility of the announced trajectory.
This content has been automatically translated using artificial intelligence. While we strive for accuracy, some nuances may differ from the original French version.
