France is ‘putting the house in order’ and can slash deficit to 3% in three years, central bank governor tells CNBC

France’s deficit was 5.1% of GDP last year; Banque de France Governor Emmanuel Moulin said the government’s 5% target should be met and that reducing the deficit to 3% by 2029 is possible. He cited roughly €10 billion in additional annual debt-servicing costs, while French OAT yields have surged to multi-decade highs amid political and fiscal uncertainty. The government is targeting €54 billion in spending cuts, but passage of its 2027 budget faces obstacles in a divided parliament.

Analysis

The key pricing question is not whether France can eventually reach its deficit target, but whether a fragmented parliament can pass and sustain measures that make the path credible. Central-bank reassurance cannot substitute for legislation; proposed savings matter only once the budget survives parliamentary bargaining and implementation risk. Higher debt-service costs also make the adjustment politically harder: cuts or revenue measures can weaken activity, invite further resistance, and undermine the fiscal assumptions they were meant to support.

Over the next 1–3 months, budget passage and the OAT–Bund spread are the cleanest signals. Separate France-specific repricing from the global rise in rates by watching the spread, not the OAT yield alone. A widening spread could feed a sovereign–financial-sector channel through holdings and collateral sensitivity, while safe-haven demand favors Bunds; do not assume equal exposure across French banks or insurers without balance-sheet data. Persistent widening could spill into other higher-spread euro-area sovereigns and weigh on the euro. Conversely, a credible, durable budget could unwind the political-risk premium even if global yields remain elevated.

Over 6–18 months, election positioning raises the chance that fiscal plans are revised or challenged. The consensus risk is treating official deficit targets and savings announcements as deliverable; the contrarian risk is that current spread stress overstates France-specific deterioration because global rates are doing part of the work. Verify budget passage, measures’ scored savings, and OAT–Bund spread behavior before sizing a view.

Key Decisions for Investors

• Watchlist / conditional trade: if the budget fails, is forced through without durable support, or materially weakens its savings measures, short French OAT duration against DV01-matched German Bund duration. Enter on confirmation in the OAT–Bund spread rather than on yield headlines; the relative structure limits exposure to a parallel global-rate selloff. Risk/reversal: a durable budget and sustained spread compression falsify the widening thesis.
• Do not treat the governor’s confidence or a stated deficit target as a catalyst by itself. Track parliamentary votes, credible independent scoring of savings, and whether implementation survives political pushback; absent confirmation, avoid an outright directional OAT position.
• Monitor French bank and insurer credit/equity exposure as a second-order risk, but require institution-level sovereign holdings, capital and collateral data before expressing a single-name short. Broad spread stress—not one institution’s exposure—would be the trigger to reassess euro-area financials.
• If budget credibility improves and the OAT–Bund spread compresses despite stable or rising global yields, consider reversing the relative trade. A renewed widening tied mainly to U.S. or global rate moves, rather than French-specific spread action, would also argue against the thesis.