Budget negotiations break down; French bonds face sell-off, 30-year yields hit sixteen-year high.

```

France's government bond market suffered a heavy blow, with the 30-year bond yield soaring to its highest level since 2009 as budget negotiations broke down, triggering investor concerns over France’s fiscal outlook.

On December 19, according to Bloomberg, France’s 30-year government bond yield rose by 7 basis points to 4.525%, and the 10-year bond yield increased by 6 basis points to 3.614%, approaching a nine-month high. The immediate trigger for this sell-off was French Prime Minister Sébastien Lecornu's statement that it was impossible to pass the 2026 budget by the end of the year.

Compromise talks between representatives of the French Senate and National Assembly broke down rapidly on Friday, with both sides failing to reach agreement on the budget. This means the government will have to extend the current budget into 2026, severely limiting its ability to clean up public finances.

Budget Negotiations Breakdown Hits Market Confidence

The failure of the budget talks was a major blow to Prime Minister Lecornu. When he was reappointed as Prime Minister in October, he had made passing the national budget by year-end his "mission."

Lecornu said on social media platform X: "Therefore, Parliament will not be able to pass the budget for France by the end of the year. I regret this, and our fellow citizens should not have to bear these consequences." He also said he would meet with leaders of other political parties on Monday to discuss "measures to protect the French people and the conditions for finding solutions."

Although the extension mechanism can prevent a government shutdown, it is only a stopgap. New spending projects cannot be approved, including President Macron's important proposal to increase defense spending by 6.5 billion euros over the next two years.

Fiscal Consolidation Plan Faces Setback

The stalled budget will seriously impede France's process of reducing its fiscal deficit. Lecornu’s previously proposed package aimed to lower the deficit ratio below 5% of GDP by 2026 and to within 3% by 2029, a key requirement of the European Commission.

François Villeroy de Galhau, Governor of the Bank of France, said on Radio France Internationale on Friday that the budget extension would "lead to a deficit much higher than the ideal level... because it does not include any cost-saving measures nor any tax measures."

Due to domestic political turmoil and uncertainty about the fiscal outlook, France’s sovereign credit rating has been downgraded several times. The failure of the latest budget negotiations further increases market concerns about the sustainability of France's public finances.

Setback for Political Compromise Strategy

Prime Minister Lecornu’s failure to push through the budget was mainly because he voluntarily gave up a constitutional power that would allow the government to pass the budget without a parliamentary vote, but would expose the Prime Minister to a no-confidence vote.

To win support, Lecornu turned to a compromise strategy, making a series of concessions to the center-left Socialist Party, including suspending pension reforms promoted by Macron’s government, thus securing passage of part of the budget related to France’s social security system.

However, talks remained deadlocked over the core national budget text. The opposition filed thousands of amendments, delaying and causing constant controversy during the review process. Last month, an early version of the budget was rejected, with only one parliamentarian voting in favor.

Risk Warning and DisclaimerThe market involves risks and investments should be made cautiously. This article does not constitute individual investment advice and does not take into account the special investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views or conclusions in this article fit their particular situation. Investment on this basis is at your own risk. ```