Is the France–Germany spread of 100 bps justified? - 21 September 2026

With a yield spread of nearly 100 basis points over Germany, 10-year French OATs are pricing in a substantial risk premium. While this premium appears excessive in light of France’s current rating, it accurately reflects the negative momentum of its sovereign credit profile and fears of future downgrades. An analysis of a situation that is not without parallels with the Italian crises of 2018 and 2022.

In the euro area, the relationship between long-term interest rates and each country’s economic fundamentals is structured in a fundamentally different way from that seen in other regions. In the UK, for example, economic variables are incorporated into domestic monetary policy and are also expressed through the exchange rate, both of which affect the level of long-term yields. In the case of a country such as France, by contrast, long-term yields reflect the economic fundamentals of the euro area as a whole — growth, inflation, unemployment — plus a specific local risk premium. This risk premium has two components: the risk of default (or debt restructuring) and the risk of exiting the euro area (a return to the franc).

As leaving the euro does not appear to be on the agenda of the political parties most likely to come to power at the next election, the main risk is therefore default risk, which can be measured through the ratings assigned by the major agencies¹. Today, as in the past, there remains a degree of consistency between these ratings and the hierarchy of long-term yields among the main euro-area countries (Chart 1).

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¹ The rating agencies state explicitly that their ratings are intended solely to assess the creditworthiness of a sovereign or a company, and therefore default risk. Legally, debt restructuring also constitutes a default.

Chart 1 provides two main pieces of information: an upward-sloping straight line representing the average “theoretical”² relationship between rating and long-term yields; and each country’s deviation from this theoretical line.

The slope of this line illustrates the elasticity of long-term yields to changes in rating levels. This elasticity is not stable: it changes significantly depending on investors’ appetite for or aversion to risk. This sentiment depends on many global factors and, above all, regional ones. Elasticity was extremely high during the euro crisis, whereas it is fairly low today: 11 basis points per rating notch³, a level almost as low as before the global financial crisis (Chart 2). This low degree of sensitivity to ratings — and therefore to risk — reflects strong confidence on the part of financial markets in the health and governance of the euro area. Recent trends nevertheless point to some slight deterioration, partly linked to the energy shock stemming from the war in Iran, and probably also to the approach of the elections in France and Italy.

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² The relationship between long-term yields and ratings is calculated using a simple linear regression.
³ On average, a country rated, for example, “AA” will have a 10-year yield 11 basis points higher than that of a country rated “AA+”.

As Chart 1 illustrates, there are sometimes substantial deviations from this average elasticity. In France’s case, market pricing is particularly severe, appearing justifiable only if France’s rating were to fall to BBB-, that is, to the threshold of “junk bonds”⁴, compared with an average rating of A+/AA- across the five rating agencies used by the ECB_⁵_.

These deviations from the “theoretical” level are mainly explained by recent and expected changes in agency ratings. Portugal (Fitch, early September) and Ireland (Moody’s, late August) are on an upward ratings path, as are Spain (September 2025) and Greece (November 2025). Italy also benefited from an upgrade at the end of 2025 (Moody’s), but the outlook appears to be losing momentum in light of a somewhat higher-than-expected public deficit in 2025 (3.1% of GDP), and with elections due in 2027. France and Belgium, by contrast, are suffering from downward rating trends and negative outlooks. Investors are therefore adjusting the yield hierarchy in line with an overall trend likely to affect future ratings and therefore default probabilities.

We have partly incorporated these factors by adding a second variable alongside the average ratings of the major agencies⁶: the change in those same ratings over the past 12 months. Applied to the French case (Chart 3), the situation is as follows: the theoretical spread over Germany consistent with France’s rating is 50 basis points, but when recent rating momentum is taken into account, it rises to 63 basis points.

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⁴ “Junk bond” is trader slang for a bond rated below BBB-.
⁵ The ECB adjusts the terms of its repo operations and quantitative easing (where applicable) by using the highest rating among the following five agencies: S&P, Moody’s, Fitch, DBRS and Scope.
⁶ For reasons of historical data availability, we used the average rating of the three largest agencies (S&P, Moody’s and Fitch).

This revised calculation nevertheless remains well below the current spread of nearly 100 basis points. Investors are therefore pricing in a marked deterioration in France’s rating over the coming quarters, for obvious reasons: a higher-than-expected deficit, a budgetary impasse, and opinion polls favorable to populist candidates. After the election, risks are likely to focus on further fiscal slippage, a possible confrontation with Brussels, the repeal of certain reforms, including pension reform, and so on.

But what exactly do these 100 basis points tell us? Applying the current elasticities of the two models to a downgrade of France’s rating from slightly above “A+” today⁷ to “A”, the theoretical spread would rise to 59 basis points in the static model (Model 1 in the chart) and to ...112 basis points in the dynamic model (Model 2 in the chart). And if, by autumn 2027, the average rating from the three main agencies were to deteriorate to “A-”, the dynamic model would imply a spread of 160 basis points (68 basis points in the static model).

The current France–Germany spread is therefore explained half by France’s current rating (50 basis points), by a further 10 to 15 basis points due to the negative rating momentum over the past 12 months, and for the remainder by negative expectations for the coming quarters. In a dynamic model, which takes into account the often-significant impact of second derivatives in financial markets, the current 100 basis-point spread appears consistent with the loss of another rating notch from the major agencies over the coming quarters, with no prospect of stabilization. The next key dates are 16 October (Fitch), 23 October (Moody’s) and 27 November (S&P).

The current situation in France partly⁸ resembles that experienced several times by Italy. In 2018, with the surprise populist coalition between the Northern League and the Five Star Movement, and then to a lesser extent in 2022 with the election of Giorgia Meloni, the Italian risk premium diverged sharply from the level implied by agency ratings. The Italian spread eventually returned to a level consistent with its rating, but it required a great deal of patience (Chart 4).

If, under a political scenario that is currently difficult to anticipate, France’s rating were to stabilize credibly at its current level, or even one or two notches lower, the France–Germany spread would also eventually fall back — probably into a range of between 50 and 70 basis points, in line with the static model. It is precisely this credibility that is currently lacking.

Lastly, as was somewhat the case with Italy in 2018, French political risk could ultimately begin to weigh on other euro-area countries — but to what extent? Optimists will argue that, precisely in light of the Italian experience, which was ultimately absorbed, the shock should remain specific to France, with no genuine systemic consequences for a euro area that is now fundamentally sound. But this will be a crucial point for European financial markets to consider, and it too remains highly uncertain.

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⁷ S&P: AA-, Moody’s: A+, and Fitch: A+.
⁸ Only in part, because Italy between 2012 and 2024, with its “BBB” rating, was at risk of losing its investment-grade status, which would have had truly disastrous consequences.