Five-year credit default swaps (CDS) on French government bonds stood at 86.8 basis points on Tuesday, according to data from financial information provider Bloomberg. At the end of August, they were at 32.8 basis points, and at the start of the year at 29.7.

Insuring $10 million of French sovereign debt against default now costs around $87,000 a year. In the summer, the same protection cost less than $33,000.

Five-year sovereign CDS in basis points since the start of 2026 (Chart: finews; data: Bloomberg)

Worse Than the Pandemic Shock

That is higher than in March 2020, when the pandemic rattled markets. At the time, French CDS peaked at 51.3 basis points.

At the start of the year, France was still level with Italy and below Greece. Now, protection against a French default costs around 20 basis points more than for Italy (66.9) and almost twice as much as for Greece (47.7).

Contagion Reaches Berlin

The unease is spreading to other euro-area countries. Spain's CDS have doubled to 31 basis points since late August.

In early October, Prime Minister Pedro Sánchez called a snap election for November 29. Even Germany is not entirely spared, with the cost of insuring federal debt rising from seven to 12.1 basis points.

Sovereign CDS levels on October 20, 2026, and change since the end of August (Chart: finews; data: Bloomberg)

Switzerland Keeps Its Cool

Switzerland is a different story. Insuring Swiss government debt costs 8.6 basis points, less than for Germany and roughly where it stood at the start of the year.

That said, the market for Swiss sovereign CDS is thin. Prices should therefore be read as indicative at best.

Taking the Temperature With the Franc

The Swiss side of the crisis shows up more clearly in the currency market. For Karsten Junius, chief economist at J. Safra Sarasin, the euro-franc exchange rate is the cleanest gauge of sovereign risk in the euro area.

He expects pressure on the euro to persist until a credible fiscal solution is in sight. Union Bancaire Privée (UBP) sees the euro at 0.94 francs by year-end and at 0.92 by mid-2027.

Over the longer term, the Geneva-based private bank's models suggest levels just below 0.90 are possible. UBP does not expect the European Central Bank to step in for now, while Lombard Odier expects the exchange rate to hold steady.

A Budget Going Nowhere

The crisis is rooted in French fiscal policy. The minority government of Prime Minister Sébastien Lecornu aims to cut the deficit from 5.4 percent to 5 percent of economic output in 2027.

Public debt stands at 119 percent of gross domestic product. In early October, the yield on 10-year government bonds climbed to almost 5 percent, its highest level since 2002 (as finews.ch reported, article in German).

After a brief respite, CDS spreads widened again this week. Over the weekend, protests in several cities turned into riots.

Overnight into Tuesday, the National Assembly suspended its budget debate. According to David Amiel, minister for public finances, lawmakers' amendments have worsened the draft by around 10 billion euros ($11.5 billion).

The debate is set to resume on October 27.

"Too Big to Save"

Mark Dowding, fixed-income chief investment officer at RBC BlueBay, draws a sharp parallel with the euro debt crisis 15 years ago. "Back then, we worried that some peripheral euro-area countries were 'too big to fail'; today, the fear could arise that a country like France might ultimately be 'too big to save'," he said.

Hedge funds have been cutting their positions in French bonds. Other houses take a calmer view.

"Even if France's fiscal problems remain unresolved, we do not expect a new euro crisis," said Johannes Mueller, head of research at DWS. Lombard Odier likewise sees no grounds for a sovereign debt crisis.

Markets, the bank says, are pricing in uncertainty, not a worst-case scenario. In fact, the cost of default protection is still only around a third of its euro-crisis peaks.