Euro hits 17-month low as French bond stress builds and Spain calls snap election

Investors are demanding a bigger premium to lend to France than at almost any point since the euro-zone debt crisis, and on Monday the currency paid for it. The euro fell as low as $1.1161 in Asian trading, its weakest level since May 2025, before recovering to about $1.12 in Europe.

By about 6:30 a.m. ET the euro was at $1.1204, down roughly 0.4% from Friday's close, after falling about 2.5% in September and four straight weekly declines. It also lost ground against the Swiss franc and the British pound. In Paris the CAC 40 fell about 1% to a six-month low, while the broader Stoxx 600 index edged higher, a split that puts the problem in France rather than in Europe as a whole.

Spain added a second political shock. Prime Minister Pedro Sánchez called a snap general election for Nov. 29, days after parliament rejected his minority government's housing decrees. Spanish bonds barely moved.

The French premium

Last week's selling in French government bonds set up Monday's move. Early Friday the 10-year French yield touched 4.989%, the highest since 2002, and the premium over equivalent German debt reached 152 basis points, the widest since 2011. The gap ended the week near 140 basis points after widening by 34 basis points, the biggest weekly jump in 17 years, according to LSEG data. At the start of September it was 86 basis points.

The pressure resumed on Monday. The French 10-year yield rose about 6 basis points to roughly 4.92% in the European morning while German yields were little changed, leaving the spread in the mid-140s.

The cost of insuring French government debt against default has risen with it. France's five-year credit default swaps reached 81 basis points early Friday, and Macquarie strategist Thierry Wizman wrote that the swaps market was signaling the spread widening reflects "higher sovereign default risk in France." Scope Ratings cut France to A+ from AA- last month, in line with Fitch and S&P Global Ratings.

A budget that has not calmed the market

The selling followed the government's 2027 budget, presented on Oct. 1. It targets a public deficit of 5% of gross domestic product next year, down from a revised 5.4% this year, using €43 billion of new measures; counting earlier decisions that phase in, the government puts the total effort at €54 billion. Its own figures show why lenders are nervous: public debt is expected to reach 119.3% of GDP this year, and annual interest costs are projected to rise from €79.2 billion in 2026 to €91.2 billion in 2027. Finance Minister Roland Lescure insisted last week that France remained a solid borrower.

ING economists estimate the deficit would reach about 6.5% of GDP without the measures, and that debt would still climb to about 121.7% of GDP in 2027 even if the plan passes in full. Passing it is the harder part. Prime Minister Sébastien Lecornu's minority government has no stable majority. The bills go to the National Assembly this week, with floor debate due to start Oct. 13, and ING expects weeks of bargaining that most likely end with the government forcing a modified budget through under Article 49.3 of the constitution, which exposes it to a no-confidence vote.

"France is the real deal in terms of risk premia for the euro," said Neil Wilson, a strategist at Saxo, noting that the deficit plans could be watered down in parliament. Brent Donnelly, president of Spectra Markets, said budget promises made now "are not super credible with a change of power coming soon," a reference to the presidential election due in April 2027. Wizman argued that bond investors are also weighing the prospect of a far-right or far-left president, since "neither the populist Left nor the populist Right are fiscal hawks."

Spain's snap vote

In a televised address from the Moncloa Palace, Sánchez said that after informing the head of state he had called an extraordinary cabinet meeting Monday morning to dissolve parliament. The decree setting the vote is due to be published in the official state gazette on Tuesday. The next election had not been due until 2027.

The trigger was Friday's defeat of two housing decrees, which would have extended rental contracts and limited evictions of vulnerable tenants, after the Catalan separatist party Junts voted against them. Spain is still running on its 2023 budget because the government could not pass a new one. Most polls show the conservative People's Party and the far-right Vox winning a majority together. "To do more, we need to renew and broaden the support of the people," Sánchez said.

Bond investors were unmoved. Spain's 10-year yield was around 4.13% on Monday morning, roughly 66 basis points above Germany's, less than half the French premium. Traders had largely expected the election, and Spain's economy has been among the strongest in the developed world.

Contagion, or a French problem?

The open question is whether France's trouble spreads. Belgian bank KBC wrote on Monday that there had been "clear contagion towards the likes of Belgium or Italy" since last week; Italy's premium over German debt neared 110 basis points on Thursday. "The big question is whether this is the start of a new euro sovereign crisis or whether markets have already overshot," said Jim Reid of Deutsche Bank. Ninghui Liu of State Street Investment Management called it "more of a country story rather than the euro crisis" for now.

What the central bank has said

The European Central Bank has a tool built for this situation, at least on paper. Its Transmission Protection Instrument, created in 2022, lets it buy a country's bonds when financing conditions deteriorate for reasons not justified by fundamentals. It has never been used, and it requires the country to be pursuing sound fiscal policy, which ING says would at a minimum mean France adopting its budget.

Policymakers sound in no hurry. ECB President Christine Lagarde told the French newspaper La Croix last week that debt "close to 120% of GDP and not on course to be brought under control" is "a serious matter," while insisting "it's not 2008 or 2011." Bundesbank President Joachim Nagel said on Thursday that the central bank's focus is price stability, not "certain spread levels." The ECB has raised interest rates twice since June, with euro-zone inflation at 3.8% in September.

The dollar's side

The euro's slide is also a dollar story. Friday's report that the U.S. added only 29,000 jobs in September cut bets on a Federal Reserve rate increase this month: futures implied about an 18% chance of an October hike on Monday, down from 64% last week, according to the CME FedWatch tool. Even so, the dollar index rose about 0.3%, supported by 10-year Treasury yields near 5.27%.

The next tests come quickly. The French budget bills reach the National Assembly this week, Spain's election decree is due Tuesday, and minutes of the Fed's September meeting are released Wednesday.