Ongoing political instability in France has sent banking stocks tumbling and government bond spreads widening, with BNP Paribas, Crédit Agricole and Société Générale all down 8%–10% this week.
Tension in Paris grew after Prime Minister François Bayrou shocked lawmakers by calling a confidence vote for September 8. Few expect him to survive it, fuelling talks of a government collapse and political instability just as investors are already nervous about France’s finances.
According to data provider Morningstar’s Johann Scholtz, senior equity analyst, the spread between French 10-year government bonds and German bunds jumped 14 basis points to 82 bps, close to its November 2024 highs.
The instability stems from a fragile government facing the risk of collapse, repeated confidence votes, and the growing influence of populist parties. These factors are amplifying investor concerns over France’s already high debt and deficit levels.
Scholtz warned that widening sovereign spreads could squeeze French banks. “Wider sovereign spreads threaten to compress net interest margins and may force French banks to mark down bond holdings,” he said. A prolonged period of higher spreads would also lift long-term funding costs as debt is refinanced at high yields.
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Still, Scholtz believes the market has “overreacted”. He pointed out that French banks are geographically diversified and less reliant on their home market than many peers. “We believe BNP Paribas is undervalued, while Société Générale is fairly valued, and Crédit Agricole is currently overvalued. France accounted for just 26% of BNP’s 2024 revenue, while Société Générale and Crédit Agricole had higher exposure at 41% and 47%, respectively – still less concentrated on its home market than many other European banks,” he added.
Not all asset managers think so. Thomas Gabbey, fund manager at Schroders, said his team had already shifted portfolios underweight French sovereign bonds from June and added further to the position this month, arguing markets were not adequately pricing in political and fiscal risk. “Renewed French political uncertainty has scope to thwart Europe’s growth rebound, and we felt investors were underestimating the danger. As a result, we have positioned our portfolios accordingly,” he said.
Similarly, David Roberts, head of fixed income at Nedgroup Investments, said his team is avoiding French and Italian sovereign bonds despite the sell-off, citing the risks created by France’s fragmented political system and stalled reform efforts. “Debt levels have been rising relentlessly, and efforts to curb them have met a resounding ‘no’,” he said. Instead, Roberts prefers to allocate to a diversified portfolio of high-quality investment-grade corporates.
Guillermo Felices, global investment strategist at PGIM Fixed Income, said markets had responded predictably, with equities underperforming, spreads widening and the euro weakening. However, like Scholtz, he too emphasised that France’s fiscal strains are “not a new story” and argued that talk of bailouts is premature. “For long-term investors who are prepared to stomach some volatility, the political turmoil is creating tactical opportunities, especially if spreads continue to increase,” Felices said.
