France Adds Another Dangerous Signal! Blackstone President and Fed Governor Warn in Unison, BofA Survey Shows Record Bearishness on French Stocks

France's fiscal stress is changing in nature: it is no longer just a political headache for Paris, but has become a pricing problem for euro area assets. Blackstone President Jon Gray and Fed Governor Christopher Waller spoke out in succession on Tuesday, saying Western governments are facing a "reckoning"; on the same day, a BofA fund manager survey showed that the proportion of investors planning to underweight French stocks hit a record. A "Reckoning" Is Coming: The Same Judgment from Gray and Waller Gray described the current situation as "a bit like going through a reckoning." He pointed out that the unsustainable fiscal position of Western governments has already shown up in rising developed-market bond yields. In his view, large war-related spending and investment in technology and AI have combined to create a perception that some countries are "running deficits far above their inherent growth ratesand you worry that a shock could come at any time." Gray's judgment is clearly differentiated: the higher risk lies with countries that have slow growth and huge deficits; the United States, by contrast, is relatively lower risk because of its higher growth rate and because it still attracts large capital inflows to support tech and AI investment. "Ultimately, the U.S. will eventually face hard choices, but I think right now this is more of a challenge for France, the U.K. and continental Europe," he said. "From past experience, these problems tend to be dealt with only when a crisis appears. We saw this in Greece, and unfortunately it feels like we are heading in that direction now." Waller echoed this logic later at the same forum: the United States' higher growth rate, combined with capital inflows from other countries, should help the world's largest economy avoid a French-style fiscal predicament. "Boy, did it blow up all of a sudden," he said. Waller offered an actionable criterion: when rising bond yields are driven by inflation expectations and fiscal concerns (as in France), that is a problem; if they are driven by higher growth, that is a good thing. "If you're facing higher yields because of higher growth, to me that's a good thing; if it's because of more fear of inflation, that's not a good thing," he said. As for the United States, he believes "fiscal dominance"having to rely on monetary policy to finance the governmenthas not yet emerged. "So far, at least for the United States, we're not there yet." He also noted that U.S. deficit concerns have not yet shown up in demand at Treasury auctions. Why Has France Become the Target? The "French challenge" Gray referred to is backed by specific numbers. France's deficit is expected to reach 5.4% of GDP in 2026, with a target of squeezing it down to 5% in 2027, still far above the EU's 3% reference ceiling; government debt has risen to 119% of GDP (in the second quarter of 2026, a record of about 3.6 trillion euros), nearly twice that of Germany, and is expected to rise further to 121.7% in 2027. French Prime Minister Sbastien Lecornu submitted the 2027 budget draft on October 1, containing about 54 billion euros in spending cuts and tax increases, but the plan assumes 1% economic growthan assumption France's fiscal watchdog calls "optimistic"; without these cuts, the deficit would approach 6.5%. The International Monetary Fund (IMF) is even more pessimistic: if policies are not adjusted, the deficit ratio could widen to 6.2% in 2027-2028 and remain above 6% through 2030. Politics is the biggest discount on execution. After the 2024 legislative elections, parliament has no majority, and there have been five prime ministers in two years (Barnier stepped down in December 2024, Bayrou in September 2025); Lecornu had to invoke Article 49.3 of the constitution to bypass a vote and suspend the 2023 pension reform in order to barely pass this year's budget in February 2026. Next April's presidential election further amplifies uncertaintyrecent polls show the race could turn into a second-round showdown between far-right National Rally's Marine Le Pen and far-left Jean-Luc Mlenchon. At the same time, nationwide protests by young French people over school funding are demanding an additional 10 billion euros in investment. The Market Is Already Pricing It: From "Core Country" to "Outlier" The signal from the bond market is clearer than parliamentary debate. The 10-year French government bond yield recently rose to 4.91% to 4.92%, the highest since July 2002; the spread over German bunds at one point exceeded 150 basis points, the widest since the 2012 eurozone debt crisis. Even more telling is the "rating inversion": France's sovereign rating is Moody's Aa3 (negative outlook), Fitch and S&P A+, clearly higher than Italy's (Moody's Baa2), yet France now borrows more expensively than Italy. Equity pricing has been just as dramatic. France's blue-chip CAC 40 index has fallen 3.8% year to date, while the pan-European benchmark Stoxx Europe 600 index has risen 7.8% over the same period. Selling pressure in bonds and stocks has further transmitted to the exchange rate: the euro fell to 1.116 against the dollar in early October, the weakest since May 2025, while at the start of the year it was still above 1.20. Speculative positioning has reached extremesU.S. Commodity Futures Trading Commission (CFTC) data show that in the week ended September 29, euro short contracts reached 301,439, the most on record (about 38 billion euros); but note that net euro shorts were actually only 63,256 contracts, the lowest since April 2025the market is not uniformly bearish, but both longs and shorts are crowded, which instead makes the euro more prone to sharp swings. Signs of contagion are emerging but remain limited: Italy's 10-year bond spread rose from 102 basis points to 109 basis points on October 1, the largest one-day jump since 2020; Greek spreads also rose in tandem. BofA estimates that for every 10 basis point widening in the France-Germany spread, the euro falls about 0.4% against the dollar; Goldman Sachs notes that in normal times the spread's impact on the euro is close to zero, but it is significantly amplified when markets are under severe stress. In addition, French government bonds account for about a quarter of the Morningstar Eurozone Treasury Bond Index, a higher weight than Italian and German government bondsmeaning European savers holding "safe" eurozone government bond funds, or default pension options, actually have greater exposure to Paris than to Berlin. The Link to the Global Bond Market Main Theme: AI Debt and "Money Grabbing" France's predicament is not isolated. The bond market is being pulled simultaneously by three forces: geopolitical conflict pushing up energy prices, rising inflation expectations, and the long-term funding demand created by AI infrastructuregovernments and tech giants are competing head-on for capital in long-end capital markets. Former British Prime Minister Rishi Sunak offered a striking judgment at the same forum: AI will drive record fundraising, and tech companies are expected to become the largest issuers of long-term bonds next year. "Net issuance of these kinds of bonds by tech companies will exceed that of the U.S. government," he said. This echoes the IMF's earlier warning in its financial stability reportAI-related bond issuance has jumped from less than 1% of global investment-grade issuance to an important share of about 10%, squeezing sovereign debt financing space. The ECB's position is therefore even more difficult. Although France is under pressure, it does not meet the condition of "spread widening lacking fundamental justification"France is in the EU's excessive deficit procedure, which makes it very difficult for the ECB to activate its Transmission Protection Instrument (TPI); the ECB Governing Council will meet on October 29. On ratings, the market is waiting for two key dates: Moody's on October 23 (Aa3, negative outlook, meaning a downgrade is more likely) and S&P's assessment on November 27. The Other Half of the Roundtable: AI Governance and the Jobs Debate In the same discussion, AI was both "the biggest existential risk" (in Gray's words, though he stressed it is "slow-moving" and "will force people to make very difficult choices") and the focus of debate over governance and jobs. Former U.S. Commerce Secretary Gina Raimondo said she is more worried about governance challenges, "We need to build governance frameworks with the same urgency and intensity that AI researchers bring to developing the technology." Tata Sons Chairman N. Chandrasekaran worries about malicious use of AI and short-term labor restructuring, but believes that over the medium to long term "it will be extremely powerful." Infosys Chairman Nandan Nilekani bluntly called the claim that "AI will replace a large number of human jobs" "nonsense," predicting instead that the technology will activate small businesses and create new skill demands. Indian Prime Minister Modi said in a forum speech that technology is transforming India's industries, and the country already has more than 2,000 global capability centers serving international companies. BofA Survey: A Record "Vote with Their Feet" Institutional investors' attitudes have been quantified by BofA's monthly survey. The survey covered regional fund managers and was conducted from October 2 to 8. The results showed that 56% of respondents plan to underweight French stocks over the next 12 monthsmaking France the least popular market in Europe. An even higher proportion of respondents (net 63%) said "French fiscal sustainability and the 2027 election cycle" is the biggest political risk for European markets over the next year. The conclusion was written into a client report by the BofA team (including Paulina Strzelinska and Sebastian Raedler). It is worth noting that Raedler himself is more optimistic: he upgraded French stocks to "overweight" last week, arguing that the further upside for the France-Germany spread is limited. This divergence precisely shows that current pricing has already factored in a considerable degree of political risk. Institutional Views Views on France itself remain divided. BNP Paribas senior economist Stphane Colliac believes France is not facing a debt crisis, arguing that France's actual debt servicing cost is only in the low 2% range, significantly below rising market yields; but he also points out that France failed to meet its budget targets in three of the four years from 2023 to 2026. In addition, Intesa Sanpaolo's Gian Marco Salcioli warned that this kind of spread widening "often turns interest rate risk into broader risk," namely credit risk. Candriam Chief Investment Officer Nicolas Forest put it more bluntly: France "has reached levels close to the European debt crisis." Fitch listed "persistent political fragmentation" as a key weakness for France.