France’s borrowing costs are surging as investors around the world wake up to the risk of a full-blown public debt crisis in Europe’s second-largest economy. Stress in financial markets has now started to spread beyond its borders, raising fears that political dysfunction in France could cause a broader, regional problem. Memories of the sovereign debt crisis that threatened the single currency’s survival 15 years ago are starting to stir.
But is it really going to get that bad again? Alternatively, you can simply skip it and pretend it isn’t happening — but, hey, that’s what got us here in the first place … France hasn’t run a balanced budget in more than 30 years. It hasn’t been able to keep its budget deficit within the EU-agreed limit since 2019, due to the soaring costs of its pension system and challenges such as rearmament and the green transition.
France’s debt burden is now so great — and growing so quickly — that some are starting to worry it can’t repay it all. What happens if French woes get worse? Is Europe facing another existential crisis?
Will the European Central Bank run to the rescue with “whatever it takes”? Investor concerns about France’s fiscal and political impasse have ballooned. For many years, investors considered Germany and France as roughly equivalent credits: The premium they demanded to hold 10-year French bonds over comparable German ones was measured in pennies.
But since the pandemic, and more recently since President Emmanuel Macron’s disastrous gamble on early elections two years ago, it has started to increase — first gradually, now suddenly. From 0.55 percentage points in mid-September, it had risen to 1.45 by Monday morning. It hasn’t been that high since the 2012 debt crisis.
In absolute terms, the French 10-year bond yield is nearly at 5 percent, the highest it’s been since 2008. Concerns are serious enough for Bank of France Governor Emmanuel Moulin to warn that “everything must be done” to avert a debt crisis ahead of the 2027 presidential election. France has been an outlier within Europe in recent weeks, but sovereign yield spreads — those country-specific risk premiums that investors demand — have also started to widen for Italy, Belgium and Greece.
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