Will France have a government (and a budget) for Christmas?An update

We were fully aware that Prime Minister Barnier ’s government operat ed with a fragile relative majority, with the far-right acting as a kingmaker. That said , the government's vulnerability seems to be higher than we anticipated . In this report , we explore some potential scenarios and consequences for spreads . The far-right National Rally has threatened to dismiss the government by the end of the year and has increased pressure on the government over the last few days. T he period from December 18-20 appeared to be the riskiest for the government, as P rime Minister Barnier indicated he would "likely" invoke Article 49.3 (which allows for passing legislation without a vote) to approve the budget. However, a no confidence vote could happen earlier, after the end of the debate of the Social Security budget in Parliament. Despite increasing risks, w e continue see ing more reasons for the far right to keep the government alive than dismiss it now . After all there is a big risk for Ms Le Pen that she would be held responsible if things get politically and economically worse. Our baseline scenario remains that the Budget will pass before year end , but with a lower degree of confidence than we initially had . The 10Y OAT-Bund spread closed on November 26 at its highest level since 2012 (86 bps) with the tightest 10Y spread between OAT and BTP since 2008 (40 bps). This move is widely led by a repricing of the idiosyncratic risk, which now accounts for more than 50 bps of the OAT-Bund 10Y spread. This risk could also fall very quickly in case of a deal. In case of the fall of the government, we think the OAT-Bund 10Y spread could widen to 100bps .