L’exception française

On Friday, S&P downgraded France's credit rating by one notch to AA-, citing concerns over its management of public finances. France's general government debt-to-GDP ratio now stands as the third highest in the euro area, following Greece and Italy. The downgrade is attributed to overspending during the pandemic and the energy crisis, coupled with political gridlock that has stalled deficit reduction plans and reform agendas. Given these issues, we question whether the 'exception française' justifies the narrow yield premium of only 48 basis points on French 10-year government bonds compared to their German counterparts. As a result, we are avoiding French government bonds.