France: All paths likely to mean further budget slippage and rating pressure
Thomas Gabbey, Fund Manager Global Unconstrained Fixed Income at Schroders, comments on the calling of a confidence vote in the French Government on 8 September:
"Barring any last-minute budget compromise, President Macron could be forced to appoint a new Prime Minister to form a coalition, or even call new legislative elections. All paths from here are likely to mean further budget slippage and add to rating pressure on France given its already poor fiscal outlook relative to other Eurozone peers."
"We have anticipated renewed political stress for the second half of 2025, precisely given our expectation that 2026 budget negotiations would cause disagreements across parties and new elections could be called. With this in mind, we started taking our portfolios underweight French sovereign bonds from June and added to this underweight earlier this month, as we didn’t believe the market was pricing in enough political or fiscal risk into French bonds."
"One of the key themes we have been trading this year has been the signs of a European recovery, predominantly driven by the manufacturing sector and helped by the seismic shift in German fiscal policy - specifically its front-loading of planned infrastructure spending. Renewed French political uncertainty has scope to thwart this European growth rebound and it’s something we will be watching closely for signs of impact on business optimism."