Strain on the euro won’t end in Paris

What happened

France has one of the highest deficit-to-GDP ratios in the 21-nation euro area, at about 5.4% of GDP this year.
The yield on its 10-year bond rose above 5% for the first time since 2002, peaking at 5.14% on Oct 22. It was back to about 4.98% on Oct 26.
Its debt-to-GDP ratio was 119% at the end of the second quarter of 2026, close to Greece’s 128% in late 2009.
The risk premium over safer German 10-year bonds widened to about 175 basis points on Oct 22, the widest since 2011, before easing to about 161 on Oct 26. In mid-September it was under 100.
On Oct 23, Moody’s held France’s rating at Aa3 with a negative outlook, assuming a deficit-cutting 2027 budget eventually passes. Yields eased on the news.
The same day, the National Assembly rejected the revenue half of the social security bill. More than 500,000 people protested over living costs that weekend.
The euro fell to $1.1161 on Oct 5, its lowest level in 17 months.
Italy’s 10-year bond was at about 4.56% on Oct 26, with a gap over Germany of 1.20 percentage points (120 basis points), down from 1.23 at Friday’s close. That gap first broke 100 on Sept 29, for the first time since spring 2025.

Why it happened

France’s extreme debt-to-GDP ratio is growing and the political instability surrounding the nation hasn’t made agreement on budgets or strategies to mitigate debt easy. Investors’ uncertainty surrounding France’s legitimacy in their ability to pay bondholders is growing and as yields rise, Paris is losing sight of its people’s needs. Resulting in protests and a lack of political control. As overall sentiment over the eurozone grows more uncertain, investors could see a lack of trust in Italy for example. A country who is historically risky and has a large need to keep refinancing debt and overall debt burden.

How it flows through

Falling French bond prices can hurt banks holding those bonds, weakening their balance sheets and potentially tightening lending. Growing uncertainty across the eurozone could weaken the euro, making dollar-denominated imports more expensive for European companies while potentially benefiting exporters. Finally, rising government bond yields can push up corporate borrowing costs, forcing companies to delay expansion, reduce investment, or absorb higher financing expenses that pressure profitability.

Winners and losers

Industry	Winner or loser	Why	Example companies
Banking	▼ Loser	Faces potential losses on bond holdings, higher funding costs, and increased credit risk if businesses and consumers struggle.	BNP Paribas (BNP, Euronext Paris)
Italian banking	▼ Loser	Falling bond prices can hurt banks holding those bonds, weakening their balance sheets and potentially tightening lending.	Intesa Sanpaolo (ISP, Milan)
Infrastructure	▼ Loser	Reduced public infrastructure spending could mean fewer new construction contracts.	Vinci (DG, Euronext Paris)
Aerospace exporters	▲ Winner	A weaker euro could make dollar-denominated imports more expensive while potentially benefiting exporters.	Airbus (AIR, Euronext Paris)

Names to watch

Airbus AIR

▲ Borrowing below the French state

Corporate borrowing costs for companies like Airbus SE have dropped below the French state’s borrowing rate. As investors begin to trust companies more than the sovereign nation they reside in, it shows an unusual effect which will be interesting to watch unfold.

Intesa Sanpaolo ISP

▼ Exposed if Italy is next

Watching ISP amid investor uncertainty regarding the eurozone will be interesting as policy shifts impact Intesa Sanpaolo’s net interest income and its wealth management business.

What would prove us wrong

If France reaches a credible budget agreement, investors regain confidence, and French and Italian borrowing costs ease. The euro stabilizes as concerns fade.
If investors begin selling debt across several countries, borrowing costs surge, and banks holding those bonds face losses. The ECB could come under pressure to intervene to protect financial stability.
If the ECB moves to cap Italy’s yields first.

Our call (Call #002): Italy’s 10-year spread over German bonds will be above 130 basis points on December 31, 2026, up from 120 on October 26. We’ll grade it against Il Sole 24 Ore’s closing spread that day.

Sources

Sound Street Research is an independent publication written by students. It is for informational and educational purposes only, is not personalized investment advice, and is not an offer or solicitation to buy or sell any security. Authors may hold positions in securities discussed; holdings: none.