French Government Faces Dissolution Crisis... Political Turmoil Triggers Sharp Declines in Stocks and Bonds

French Political Crisis Sends CAC 40 Down for Second Day
France-Germany Bond Yield Spread Hits Largest Gap Since April

The French government is facing the threat of dissolution, leading to sharp declines in both stock and bond markets. Prime Minister Francois Bayrou requested a vote of confidence in the National Assembly to pass an austerity budget, but the opposition has united in a vote of no confidence, heightening political uncertainty.

On August 26 (local time), France's main stock index, the CAC 40, closed down 1.7%. The CAC 40 at one point fell as much as 2.2% during the day. This marks a second consecutive day of losses, following a 1.6% drop the previous day.

The yield on French 10-year government bonds surged to 3.53% at one point during the day, reaching its highest level since March. The spread between French and German 10-year government bond yields-a key risk indicator-widened to its largest gap since April. The spread reached as much as 79 basis points (1bp = 0.01 percentage point) during the session.

NATIXIS forecast that if the government fails the confidence vote on September 8, the spread could widen to 90 basis points. Guillaume Rigeade, co-head of fixed income at Carmignac, stated, "If the dissolution of parliament becomes a reality, it would not be surprising to see the spread between French and German government bond yields widen to 100 basis points in the coming weeks." If Prime Minister Bayrou loses the vote, the government will be dissolved. President Emmanuel Macron could then either restructure the government or dissolve parliament and call early general elections.

The previous day, Prime Minister Bayrou held a press conference, emphasizing the need for austerity due to the worsening state of the national finances and using the confidence vote as leverage to pressure both the public and parliament. As of last year, France's public debt stood at 3.3 trillion euros, equivalent to 113% of the country's GDP.

However, foreign media outlets predict that the confidence vote will be difficult to pass, as the opposition, which holds an absolute majority in parliament, is strongly resisting.

Marine Le Pen, floor leader of the far-right National Rally, announced on the social media platform X (formerly Twitter) that she would vote against the government in the parliamentary vote scheduled for September 8.

Jean-Luc Melenchon, leader of the far-left France Unbowed, stated on Radio France Inter that he would call for President Macron's resignation and announced plans to propose an impeachment motion against the president next month. The Green Party and the Communist Party, which have formed a left-wing alliance with France Unbowed, also declared their intention to vote no confidence.

The Socialist Party, which had previously been cooperative with the Bayrou government, also announced plans to vote against. Olivier Faure, leader of the Socialist Party, told Le Monde on August 25, "It is unimaginable for the Socialist Party to express confidence in the Prime Minister."

Nicolas Trindade, senior portfolio manager at AXA Investment Managers, stated, "The main opposition parties signaling their intention to vote against the Bayrou government has sharply increased the likelihood of a government collapse." He warned that even if a new prime minister is appointed, the composition of parliament would remain unchanged, making it difficult to pass the budget, and that if early elections are held, there is a risk that the far right could secure a majority.

Finance Minister Eric Lombard warned that if the government fails to improve its fiscal situation, there is a risk of intervention by the International Monetary Fund (IMF), adding, "We will continue communicating with everyone to prepare the 2026 budget."

President Macron, responding to opposition calls for a vote of no confidence, said, "Political forces must seek a path of compromise and stability and fulfill their responsibilities accordingly." Regarding calls for his resignation, he stated, "The presidency exists to fulfill its elected purpose and to do what I believe is right for the country. This is what I have done since my first day in office and will continue to do until the very last moment."

This content was produced with the assistance of AI translation services.