“Anti-austerity protests on the streets, bond sell-offs in the markets”: France’s finances face dual pressure, with warnings of a bailout

Spreading anti-austerity protests heighten concerns over France’s fiscal consolidation
Government bond yields approach 5%, adding to the government’s interest burden
Prolonged fiscal troubles could lead to a bailout from international institutions

France’s fiscal troubles are roiling its government bond market. As protests against austerity measures spread, government bond yields have approached 5%, while the yield gap with Germany has widened to levels seen during the 2011–2012 European debt crisis. The government has moved to curb pension and healthcare spending to reduce the deficit, but fierce opposition and a growing interest burden are hampering fiscal consolidation. Warnings are even emerging within France that failure to resolve its fiscal troubles could force the country to seek assistance from international institutions and pursue reforms under external supervision.

French government bond yields threaten highest level since 2002

According to the Financial Times (FT) on the 20th (all dates hereafter are local time), France’s 10-year government bond yield rose as high as 4.9877% during the session, closing in on 5%. It was once again approaching the 4.9937% reached earlier this month, the highest level since July 2002. Yields continued to rise during the session after recording their biggest one-day increase in about a month the previous day. The spread over German 10-year bonds stood at about 150 basis points (1bp = 0.01 percentage point), meaning France faced borrowing rates 1.5 percentage points higher than Germany for the same maturity.

Weakness in the French government bond market has been building since the third quarter. French government bonds recorded their worst quarterly performance since 1987 in this year’s third quarter, and on the 1st of this month, the 10-year yield rose 10bp during the session to 4.96%. Selling continued into the new quarter, pushing yields to successive highs. The spread over German bonds also widened to 158.67bp early this month, its highest level since November 2011. The gap narrowed to about 137bp on the 16th, but widened again to around 150bp on the 20th, reversing much of that narrowing within days.

The cost of insuring against a government bond default has also risen sharply. The premium on France’s five-year credit default swaps (CDS) stood at about 52bp on the 25th of last month, twice its level six months earlier. It rose 25bp in the preceding three months alone and climbed to its highest level since 2013 early this month. A CDS is a derivative that compensates holders for losses in the event of a default; higher premiums increase the cost for government bond investors to hedge their risks. As of the 25th of last month, the annual cost of insuring USD 1 million (approximately USD 1.02 million) in French government bonds was USD 5,200 (approximately USD 5,308), double the amount six months earlier.

Conflict over spending cuts obstructs France’s fiscal consolidation

Fueling anxiety in France’s government bond market are the government’s austerity proposals to reduce the fiscal deficit and the fierce opposition they have provoked. The budget proposal for next year unveiled by Prime Minister Sébastien Lecornu on the 1st of this month includes measures to improve public finances by a total of EUR 54 billion (approximately USD 61.8 billion) through spending restraint and tax adjustments. Of that total, new measures account for EUR 43 billion (approximately USD 49.2 billion), including freezes on public-sector wages and pensions except for those receiving small pensions, as well as limits on local government budgets and healthcare spending. The decision to curb local government budgets and healthcare spending has heightened concerns about falling incomes and reduced public services. Student protests demanding action on teacher shortages, overcrowded classrooms and aging school facilities have added to the pressure on the government as it pursues spending cuts.

Behind the French government’s austerity drive are persistent annual deficits and a rapidly growing debt burden. France last recorded a fiscal surplus in 1974, and this year’s fiscal deficit is expected to reach 5.4% of gross domestic product (GDP). Next year’s budget proposal aims to lower it to 5%, meaning a substantial deficit would remain even after large-scale fiscal consolidation measures. According to France’s national statistics institute, INSEE, public debt stood at EUR 3.5955 trillion (approximately USD 4.12e+3 billion) at the end of June this year, up EUR 59.6 billion (approximately USD 68.2 billion) in three months. The debt-to-GDP ratio also rose from 117.5% to 119% over the same period, leaving the government with increasingly limited room to accommodate additional spending.

Table 1. France’s fiscal deficit and public debt

France’s interest spending alone to reach EUR 72.9 billion next year

Easing the fiscal burden requires reducing pension and healthcare costs, which account for a large share of spending, but cuts are difficult because they directly affect people’s lives. According to France’s Directorate of Research, Studies, Evaluation and Statistics (DREES), social protection benefit spending in 2024 totaled EUR 932.5 billion (approximately USD 1.07e+3 billion), or 31.9% of GDP. Old-age, survivors’ and health-related benefits accounted for 80% of the total, with population aging driving greater pension claims and demand for healthcare, pushing spending higher. Growth in social protection benefit spending also accelerated from 1.5% in 2022 to 4.1% in 2023 and 4.8% in 2024. Combined with a system that raises benefits to reflect the previous year’s inflation, this kept spending growing even after inflation slowed.

Borrowing to repay existing debt and interest payments are also straining the budget. Agence France Trésor (AFT), France’s debt management agency, has set next year’s medium- and long-term government bond issuance plan at EUR 340 billion (approximately USD 389 billion), net of buybacks. That is EUR 30 billion (approximately USD 34.3 billion) above this year’s planned EUR 310 billion (approximately USD 355 billion), reflecting the burden of repaying maturing bonds. As bonds issued to respond to COVID-19 and the energy crisis come due, repayments of medium- and long-term government bonds alone are set to increase by EUR 19.4 billion (approximately USD 22.2 billion) next year compared with this year. With more funds needed to repay existing debt, the French government must raise money in the market not only to cover its fiscal deficit but also to repay maturing debt.

The cost of taking on new debt to fund repayments has also risen. The weighted average yield on medium- and long-term government bonds issued from the start of this year through the end of last month was 3.55%, up 0.41 percentage points from 3.14% last year. Reflecting both increased debt and higher interest rates, the central government’s annual interest spending is projected to rise from EUR 62.6 billion (approximately USD 71.7 billion) this year to EUR 72.9 billion (approximately USD 83.5 billion) next year. Interest payments alone would increase by EUR 10.3 billion (approximately USD 11.8 billion), or about 16.5%, in one year. French Finance Minister Roland Lescure projected that interest spending would account for more than half of next year’s fiscal deficit.

Italy, Spain and Greece make progress on fiscal consolidation

Financial markets, however, see little likelihood of France’s fiscal troubles spreading into a eurozone-wide crisis. In a recent weekly report, global asset manager BlackRock said stronger European banks and expanded market-stabilization tools at the European Central Bank (ECB) had increased the capacity to respond to financial instability. It also cited the eurozone’s overall government debt-to-GDP ratio, which has fallen to about 89%, back to its 2011 level, as a factor that could contain contagion. The view is that while turmoil originating in France could weigh on the euro and neighboring countries’ government bond prices, the likelihood of it escalating into a eurozone-wide fiscal crisis is limited.

Indeed, some major investors began buying Italian government bonds and eurozone corporate bonds at lower prices early this month after their prices fell in the wake of the French government bond sell-off. Italy has built confidence in its fiscal management among bond investors and credit rating agencies by reducing its fiscal deficit from 8% of GDP in 2022 to 3.1% last year. The phased reduction of the “Superbonus” tax credit for home renovations and tighter tax administration helped improve public finances. Together with higher tax revenues driven by strong employment, these measures produced a primary fiscal surplus, excluding interest spending, equivalent to 0.8% of GDP last year. The International Monetary Fund (IMF) said Italy’s sustained fiscal consolidation efforts had helped improve investor sentiment and narrow its yield spread over German government bonds.

Spain and Greece, which experienced the European debt crisis alongside Italy, are also making progress in reducing fiscal deficits and easing their debt burdens. Spain has lowered its debt-to-GDP ratio as it gradually withdraws support measures introduced during COVID-19, alongside an economic recovery and rising tax revenues. Its debt ratio stood at 101.4% in the second quarter of this year, down 22.8 percentage points from its peak in the first quarter of 2021. In Greece, spending controls and efforts to combat tax evasion have improved both revenues and expenditure. The European Commission cited restraint in current spending and increased value-added tax revenue from improved tax compliance as factors behind Greece’s stronger fiscal performance. According to Greece’s Public Debt Management Agency, the country recorded a fiscal surplus equivalent to 1.7% of GDP last year even after interest payments, while its public debt-to-GDP ratio fell from 164.3% in 2023 to 146.1% last year.

France’s fiscal troubles raise even the prospect of a bailout

France, too, needs to reduce its fiscal deficit to restore bond market confidence. Warnings have even emerged within the government that continued fiscal deterioration could make it difficult to raise funds independently, forcing the country to seek support from international institutions. Asked in August last year about the possibility of IMF intervention if public finances deteriorated, then-Finance Minister Éric Lombard called it a risk that must be avoided, but did not rule it out. Although he later clarified that France was not facing an immediate threat of intervention by an international institution, his remarks amounted to a government-level acknowledgment of concern that leaving the fiscal troubles unresolved could lead to dependence on external assistance.

If France is pushed into requesting a bailout from the European Stability Mechanism (ESM), it would have to secure the consent of its longstanding rival Germany and accept external fiscal oversight. In principle, the ESM makes major decisions, including loan approvals, unanimously, and Germany’s share of its capital is about 26.7%. For France, which has led European integration alongside Germany, the very act of seeking approval for assistance would inevitably carry a political burden. The reform conditions attached to financial assistance are also stringent. Recipient countries must agree to spending cuts, tax reforms and other measures, and undergo regular reviews of their implementation. Subsequent disbursements can be withheld if they deviate significantly from the agreed measures. This means France could be forced to implement reforms it has delayed because of domestic opposition under the supervision of its lending institutions.