France’s borrowing costs have surged during the worst social unrest the country has seen in decades. Yields on French government bonds have risen to their highest level in nearly a quarter of a century, as investors demand higher returns for holding the country’s debt. The move reflects a growing view in bond markets that lending to France is becoming a riskier bet.
The country is struggling with a widening gap between what the government spends and what it collects in revenue. Its fragmented political landscape is deeply divided over how to close that gap. Meanwhile, hundreds of thousands of protesters have filled the streets to oppose proposed budget cuts and to demand more spending on cost-of-living relief and public services such as education. Some demonstrators have taken part in rioting and looting.
Why investors are growing wary of French debt
Bonds are essentially loans to a government or company. Governments routinely borrow this way to fund spending that tax revenue does not cover. In return, investors receive regular interest payments and the original sum at a set date in the future, and bonds can be resold to other investors before then.
Bond prices move with interest rates, inflation and confidence that the borrower can repay. When prices rise, yields fall, and the reverse is also true. France’s 10-year bond yield has climbed more than 130 basis points since June and is now above 4.9 percent. Borrowing costs are at their highest since 2002, and a growing share of tax revenue is being absorbed by interest payments that could otherwise go to essential services such as education and healthcare.
Debt levels alone do not decide how investors price risk. Market confidence depends on the strength of the economy, the mix of external and domestic debt, and whether the political system can govern effectively. Victor Lequillerier, president of BSI Economics, a think tank in Paris, said: “The sustainability of sovereign debt is rarely determined by its absolute level alone.” He added that it “depends far more on its trajectory, structure, and broader economic and financial context.”
Political deadlock and a widening budget gap
In France’s case, the paralysis of the political system is a major source of concern for bond markets. Prime Minister Sébastien Lecornu, who was appointed by President Emmanuel Macron under the country’s semi-presidential system, is struggling to pass next year’s budget in a fragmented National Assembly. The plan includes 54 billion euros ($61 billion) in savings.
Marine Le Pen of the far-right National Rally and Jean-Luc Mélenchon of the far-left France Unbowed, the two leading candidates in next year’s presidential election, oppose Lecornu’s proposals. The government could invoke a constitutional clause to bypass parliament if it deems this necessary.
Antonio Fatas, a professor of economics at INSEAD in Fontainebleau, said France’s figures are only slightly worse than those of other countries. “Are the French numbers much worse than other countries? No, but marginally they are worse, and the real difficulty here is that the political situation is such that the current government does not have an easy path to put together a budget that makes sense from a debt sustainability point of view.” He added that this is what makes France a special case at present.
National debt stands at about 3.6 trillion euros ($4 trillion), equal to 119 percent of GDP. That is up from 98 percent in 2019, the year before the COVID-19 pandemic began. Investors are, however, more focused on the deficit, which is expected to reach 5.4 percent of GDP in 2026. That is far above the European Union average of just over 3 percent.
Pensions, slow growth and comparisons with other economies
France has long had one of the largest public sectors in the developed world. Government spending is about 57 percent of GDP, second only to Finland among OECD countries. Public pensions are a particularly large item, accounting for 14 percent of GDP, a share likely to rise as the working-age population shrinks in the coming decades.
Dryden, a macroeconomist at the Centre for Sustainable Finance at SOAS University of London, said Macron had long spoken about the reforms needed to improve the fiscal outlook. He noted that Macron had called for pension reform since 2017, but that the issue is highly politically sensitive and earlier attempts have stalled several times. “Tackling this issue would resolve much of France’s fiscal burden, but that is much easier said than done,” Dryden said.
Slow growth has compounded the problem. The French economy expanded by just 59 percent of the OECD average between 2000 and 2025. GDP is forecast to grow 0.4 percent this year, after expanding 0.9 percent in 2025. While France levies some of the highest taxes of any country to fund its welfare state, its deficit widened sharply during the pandemic and has stayed above its recent historical trend.
Lequillerier said successive French governments have avoided the kind of budget reforms that helped heavily indebted peers such as Italy, Spain and Portugal bring down their deficits. “In the post-pandemic period, most European economies managed to normalise their fiscal positions and bring deficits closer to sustainable levels. France, however, failed to do so, with public spending growth persistently overwhelming revenue dynamics,” he said.
France’s debt is lower than that of several other major economies, including the United States, Japan and Italy. Each of those cases, however, has specific factors that reduce the risk. The US dollar’s status as the world’s main reserve currency lets Washington borrow relatively cheaply and in large amounts. Most of Japan’s debt is held domestically, and monetary authorities have kept interest rates at ultralow levels. Italy’s debt-to-GDP ratio is higher than France’s at 140 percent, but its deficit is smaller, at about 3 percent of GDP.
What economists say could come next
Andrew Kenningham, chief Europe economist at Capital Economics, said the level of debt a country can carry depends on several factors. Investors become more anxious when growth is slow or absent and when deficits are very high, he said, and the question of who is willing to buy a country’s debt also matters.
Lequillerier also argued that France faces more competition in the bond market than it did before. “Germany is now running larger deficits and issuing substantially more debt, while Italy and Spain have strengthened both their fiscal positions,” he said. “France therefore faces much stiffer competition for international capital within the euro-denominated sovereign bond market.”
Economists say France’s finances are far from beyond repair, but the longer the government delays tightening its spending, the greater the risk of a full-blown debt crisis. Fatas said: “What is the likelihood of France going into a debt crisis? Enough that it should worry us.” He added that a workable budget exists but would require compromises and political choices that are very difficult in the current environment.
Lequillerier said a French default is not a realistic possibility. However, he warned that if France had to seek help from an institution such as the European Central Bank or the IMF, it would suffer a “profound loss of economic credibility”. “This is not the central scenario today,” he said. “Nevertheless, the longer fiscal adjustment is delayed, the less remote such an outcome becomes.”
