Memorandum
- From
- Derek Weston via Fortune | FORTUNE
- Date
- Filed
- Economy·5 min to read
- Re
France's Debt Crisis Deepens as Bond Markets Price In Rising Default Risk
ReFrance's Debt Crisis Deepens as Bond Markets Price In Rising Default Risk
French sovereign credit default swaps hit 81 basis points and 10-year bond yields reached 4.989%, the highest since 2002, as investors weigh political polarization and a potential far-right or far-left presidency against the country's deteriorating fiscal outlook.
France's borrowing costs have surged to levels not seen in more than two decades, with the cost of insuring against a French sovereign default now the highest among major European economies, as bond investors deliver what one analyst calls a «guilty» verdict on the country's political and fiscal trajectory.
France's five-year sovereign credit default swap rose to 81 basis points early Friday, while the yield on the country's 10-year bonds jumped to 4.989%, the highest since 2002. The premium over equivalent German yields widened to 152 basis points, the most since the eurozone debt crisis in 2011. Those metrics later retreated from their highs, but the underlying pressures remain.
Thierry Wizman, global FX and rates strategist at Macquarie Group, warned in a note that the signal from French CDS pricing indicates the widening spread between French OATs and German Bunds stems from higher sovereign default risk. He described the market's reaction as a «guilty» verdict on the recent direction of France's presidential politics.
The core problem, according to Wizman, is political polarization that has emerged across Europe mainly over immigration rather than fiscal issues. In France, neither the populist Left nor the populist Right are fiscal hawks. Far-left presidential candidate Jean-Luc Melenchon is campaigning on a plan to have the central bank cancel its holdings of French debt. Far-right leader Marine Le Pen, who leads in the polls, has proposed tax cuts and vowed to bring the retirement age down to as low as 60, despite an already-generous pension system consuming an ever-larger share of the budget.
A runoff between the two candidates is expected next year, with Le Pen's National Rally party seen as the likely winner. Wizman noted that while an outright default may be a low-probability event, an RN-led presidency with an adverse influence on the 2028 budget and credit-risk perceptions is a high-probability event, near 50%. He added that the presidential campaigns have barely begun, meaning rhetoric around France's debt, potential default, and budgetary politics is set to heat up and further damage perceptions of the government's creditworthiness.
France's fundamentals remain troubling. GDP growth is anemic, projected at just 0.5% this year. The budget deficit is estimated at about 5.4% of GDP, and debt-service costs are rising as yields jump. The debt-to-GDP ratio is expected to climb to 122% next year from 119% this year, and the government's latest plan failed to halt the surge in bond yields as investors doubted its credibility. The government plans to issue over $380 billion in medium- and long-term debt next year.
France is not alone in grappling with debt woes and bond market pressure. The U.S. debt-to-GDP ratio is now 100%, and Japan's is well above 200%. But America's GDP growth is much more robust, and Japan enjoys a large pool of built-in demand for its debt from domestic investors. By contrast, France's economy is projected to grow just 0.5% this year.
Ales Koutny, head of international rates at Vanguard, told the Financial Times that demand for debt in markets that become the center of geopolitical issues «can disappear in times of crisis,» describing France as «long-term degrading credit.»
Scope Ratings cut France's credit score to A+ from AA- last month, bringing it on par with Fitch and S&P Global Ratings. The ratings firm cited the government's difficulties in meeting self-imposed deficit targets, adding that the sharp rise in bond yields this year will further increase borrowing costs and make any debt solution even more painful.
«Scope expects political fragmentation to remain elevated beyond the 2027 presidential election, complicating the substantial fiscal consolidation required to stabilize public debt and increasing the risk that measures are diluted, delayed or only partially implemented over coming years,» the ratings firm warned. «This weakens Scope's confidence in France's ability to halt, let alone reverse the deterioration of its public finances over the medium term.»
The combination of political uncertainty, sluggish growth, and rising borrowing costs has left investors questioning whether France can credibly address its fiscal challenges before market pressure intensifies further.
4
