Insights 
VT 
The French government faces political hurdles as the National Assembly failed to complete the first reading of the 2026 draft budget by the 24 November deadline. This situation threatens Finance Minister Lecornu’s aim of reducing the deficit from 5.4% in 2025 to 4.7% by 2026.
Saturday’s setback is not terminal, but it complicates achieving fiscal targets before year-end. The government might consider special procedures or using Article 49.3, though this has been dismissed due to political risks involved.
Uncertain Fiscal Future
The government’s failure to get the 2026 budget passed creates significant uncertainty for the weeks ahead. We’re already seeing this pressure in the bond market, with the spread between 10-year French OATs and German Bunds widening to 72 basis points. This is a notable increase from the roughly 50 basis points we saw earlier this autumn.
This domestic political trouble is a drag on the Euro, especially as the European Central Bank is signaling a pause in its rate cycle. With the EUR/USD pair already testing recent lows around 1.0450, we should consider strategies that benefit from further currency weakness. Put options on the Euro or outright short positions against the dollar could become more attractive.
For equity traders, the focus should be on potential downside risk for the CAC 40 index. This kind of fiscal uncertainty often weighs on banking and consumer-facing stocks, which are heavily represented in the index. We are seeing a noticeable rise in implied volatility on CAC 40 options, suggesting that buying put options could be a prudent way to hedge or speculate on a decline.
Rising Sovereign Risk
The cost of insuring against French debt default is also climbing, as seen in the rising prices for Credit Default Swaps. S&P Global already has France’s ‘AA’ rating on a negative outlook, and this budget impasse will only increase concerns about a potential downgrade in 2026. We remember how quickly sovereign risk concerns escalated during the 2011-2012 period, so these early signals should be taken seriously.
