France’s debt problems have suddenly become one of the biggest stories in European financial markets.
Searches for “dette,” the French word for debt, surged on Monday as investors reacted to rising government borrowing costs, political uncertainty and renewed questions about whether France can bring its finances under control.
The pressure is now visible well beyond Paris.
Reuters reports that the euro fell to a 17 month low against the US dollar on Monday, with concerns about France’s fiscal position among the major factors weighing on the European currency.
The biggest warning signal is coming from France’s government bond market.
The gap between French 10 year bond yields and equivalent German bonds recently climbed to around 150 basis points, reaching levels not seen since the eurozone sovereign debt crisis in 2011.
That does not mean France is already experiencing a sovereign debt crisis.
But investors are demanding a significantly higher premium to lend money to the French government, reflecting growing concern about its ability to stabilize public finances.
France’s Finance Ministry expects public debt to reach a record 119.3 percent of GDP in 2026 and rise further to 121.7 percent in 2027. In 2019, before the pandemic, the ratio was below 100 percent.
Political uncertainty is making the situation more difficult.
France is approaching its 2027 presidential election while the government is attempting to push through spending reductions and bring the budget deficit under control.
Reuters reports that French banks and other domestic assets have also come under pressure as investors become increasingly cautious about the country’s fiscal outlook.
Could the European Central Bank intervene if conditions deteriorate?
That possibility exists in extreme circumstances, but officials have warned France not to assume that the ECB would rescue its bond market.
Bank of France Governor Emmanuel Moulin said in September that everything should be done to prevent a sovereign debt crisis and stressed the importance of adopting a budget capable of putting the deficit on a downward path.
For now, France is not in a financial crisis.
But the combination of record debt, higher borrowing costs, political uncertainty and nervous financial markets means investors are watching France far more closely than they were only months ago.
And with the euro already feeling the pressure, France’s debt problem is increasingly becoming a European problem too.
