Key facts
- French 10-year bond yields reached nearly 5%, highest since July 2002.
- The spread between French and German 10-year bond yields widened to 140 basis points.
- France's government debt stands at 119% of GDP.
- The projected deficit for France in 2026 is 5.4% of GDP, exceeding the EU limit of 3%.
- Analysts believe France is not facing a debt crisis, citing its effective interest rate of slightly above 2%.
French government bond yields have surged, with the spread between 10-year French OATs and German Bunds widening to approximately 140 basis points, a level not seen since the eurozone debt crisis. This marks a significant increase from previous years when lending to France was considered nearly as safe as lending to Germany. The 10-year French borrowing cost approached 5%, a level not experienced since July 2002.
Despite these market pressures, analysts are urging calm, stating that France is not currently facing a debt crisis. Stephane Colliac, senior economist at BNP Paribas, noted that France's effective interest rate remains slightly above 2%, lower than the rising market yields. However, concerns persist regarding the sustainability of France's fiscal position, amplified by social tensions and political fragmentation.
The French government, led by Prime Minister Sébastien Lecornu, presented a draft budget for 2027 proposing €54 billion in spending savings and additional revenue, aiming to reduce the deficit to 5% of GDP from an expected 5.4% in 2026. This plan includes spending cuts in pensions and healthcare, alongside higher taxes. However, the proposed measures have not fully allayed investor concerns, particularly given France's track record of not meeting deficit targets.
France's government debt has risen to 119% of GDP, exceeding the EU's 3% deficit limit. The political landscape is also a factor, with uncertainty surrounding the 2027 presidential election and the potential for a hung parliament. While Marine Le Pen, a frontrunner, has indicated a commitment to fiscal discipline, Jean-Luc Mélenchon's party proposes significant debt restructuring and increased spending, potentially defying EU fiscal rules.