France goes into ECB week with its borrowing premium at levels last seen in the euro crisis. The 10-year French OAT yield fell 3.5 basis points on Friday to 5.040 percent, Dow Jones Newswires reported on Tradeweb prices, having hit 5.142 percent on Thursday, a 24-year high. The 10-year German Bund yield eased 1 basis point to 3.330 percent. The spread between the two closed at 170 basis points, after jumping to 177 basis points on Thursday, its highest since 2011.
The rating question that hung over Friday is settled, for now. Moody’s kept France at Aa3 with a negative outlook on Friday evening, in the decision covered in its own story on this site, and made the rating conditional on a deficit-reducing budget for 2027. The spread did not need a downgrade to reach crisis-era levels: it got there on the budget fight itself, on social unrest, and on a French composite PMI for October that fell to 48.4 from 51.1 in September, signalling contraction, against a Wall Street Journal poll expectation of 50.8. Pantheon Macroeconomics’ Claus Vistesen told Dow Jones that business confidence turned negative for the first time in nearly two years, with respondents citing the forthcoming election and concerns about public finances.
Bloomberg reported on Sunday that the rout now sits at the heart of the ECB succession endgame, and the calendar explains why the two stories have merged. Christine Lagarde’s term as ECB president runs to October 31, 2027, but she has not fully denied rumours that she will step down early, and she told La Croix this month that she does not rule out leaving a few months before the end of her term. Reuters’ explainer on the succession puts the frontrunners to succeed her as Pablo Hernandez de Cos, the former Bank of Spain governor who now runs the Bank for International Settlements, and Klaas Knot, the former Dutch central bank chief. The executive board around the presidency is also turning over: Isabel Schnabel is leaving for the International Monetary Fund, chief economist Philip Lane’s term ends on May 31, and Croatia’s Boris Vujcic has already taken the vice presidency.
Succession at the ECB is a package negotiated by euro zone leaders, and France’s fiscal position is now part of its bargaining weight. A French president would normally be one of the two decisive voices in the appointment, alongside Germany’s chancellor. A government that cannot pass its budget, borrowing at 170 basis points over Germany, negotiates from weakness, and the next president is unlikely to be French in any case, which pushes Paris toward backing a like-minded candidate from elsewhere and toward the chief economist vacancy.
For rates, the near term still runs through Thursday’s Governing Council meeting, covered in a separate story in this edition. The spread is doing tightening work the ECB did not choose, in one member state only, which is the fragmentation pattern the bank’s Transmission Protection Instrument was built for. No activation is expected this week. The question the succession adds is longer-dated: whoever leads the ECB from 2027 will inherit a euro area in which the second-largest sovereign trades as a credit, not as a haven.