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 rattling its government bond market. As protests against austerity plans spread, government bond yields have approached 5%, and 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 contain its fiscal troubles could force it to seek assistance from international institutions and implement 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 day, nearing the 5% mark. It once again threatened the 4.9937% reached earlier this month, the highest level since July 2002. Yields continued to rise intraday after posting their biggest one-day increase in about a month the previous day. The spread over German 10-year bonds was about 150 basis points (1bp = 0.01 percentage point), meaning France faced borrowing costs 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 the third quarter of this year, and on the 1st of this month, the 10-year yield rose 10bp intraday to reach 4.96%. Continued selling after the quarter ended has pushed yields to successive highs. The spread over Germany also widened to 158.67bp early this month, its highest since November 2011. It narrowed to about 137bp on the 16th but widened again to around 150bp on the 20th, reversing much of the narrowing in just a few days.

The cost of insuring against a sovereign debt default has also risen sharply. France’s five-year credit default swap (CDS) premium 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 surged to its highest level since 2013 early this month. A CDS is a derivative that compensates for losses in the event of a default, and a higher premium increases the cost to government bond investors of hedging their risk. As of the 25th of last month, the annual cost of insuring USD 1 million (approximately USD 1.02 million) of French government bonds was USD 5,200 (approximately USD 5,308), double the amount six months earlier.

Conflict Over Spending Cuts Hampers France’s Fiscal Consolidation

Fueling anxiety in the French government bond market are the government’s austerity plans to reduce the fiscal deficit and the fierce opposition to them. The budget proposal for next year unveiled by Prime Minister Sébastien Lecornu on the 1st of this month includes measures to improve the fiscal balance by a total of EUR 54 billion (approximately USD 61.8 billion) through spending restraint and tax adjustments. Of that, new measures amount to EUR 43 billion (approximately USD 49.2 billion), including freezes on public-sector wages and pensions, except those of low-benefit recipients, as well as curbs 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 a government seeking to cut spending.

Behind the French government’s push for austerity are deficits that accumulate year after year 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 bring that down to 5%, leaving a substantial deficit even after large-scale fiscal consolidation measures. According to France’s National Institute of Statistics and Economic Studies (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 cover 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 cuts to pensions and healthcare, which account for a large share of spending, but their direct impact on people’s lives makes reductions difficult. According to France’s Directorate of Research, Studies, Evaluation and Statistics (DREES), social protection benefit spending totaled EUR 932.5 billion (approximately USD 1.07e+3 billion) in 2024, accounting for 31.9% of GDP. Old-age, survivors’ and health-related benefits made up 80% of the total, with population aging driving up pension claims and healthcare demand and 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 meant spending continued to increase even after inflation slowed.

Borrowing to repay existing debt and interest spending are also putting pressure on 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 in response 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 funding needed to repay existing debt, the French government must raise money in the markets both to cover its fiscal deficit and to repay maturing bonds.

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 point from 3.14% last year. With both the debt stock and interest rates rising, the central government’s annual interest spending is projected to increase from EUR 62.6 billion (approximately USD 71.7 billion) this year to EUR 72.9 billion (approximately USD 83.5 billion) next year. That amounts to an increase in interest spending alone of EUR 10.3 billion (approximately USD 11.8 billion), or about 16.5%, in one year. French Finance Minister Roland Lescure forecast 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 that France’s fiscal troubles will spread into a eurozone-wide crisis. In a recent weekly report, global asset manager BlackRock said stronger European bank balance sheets and an expanded European Central Bank (ECB) toolkit for stabilizing markets had increased the capacity to respond to financial instability. It also cited the eurozone’s overall government debt-to-GDP ratio of about 89%, down to its 2011 level, as a factor that would help contain contagion. The view is that while turmoil originating in France could weigh on the euro and neighboring countries’ government bond prices, the risk of it developing into a eurozone-wide fiscal crisis is limited.

Indeed, some major investors began buying Italian government bonds and eurozone corporate bonds at bargain 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. Phasing down the “Superbonus” tax credit for home renovations and strengthening tax compliance helped improve its finances. Combined with higher tax revenue from strong employment, this produced a primary fiscal surplus, which excludes interest spending, of 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 the 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 lowering their debt burdens. Spain has brought down its debt-to-GDP ratio as it gradually withdraws support measures introduced during COVID-19, alongside an economic recovery and rising tax revenue. 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 revenue and expenditure. The European Commission cited restraint in current spending and higher 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 Prompt Talk of a Possible Bailout

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

If France is pushed to seek a bailout from the European Stability Mechanism (ESM), it will have to secure the consent of its longtime rival Germany and accept external fiscal oversight. In principle, the ESM makes major decisions, including loan approvals, unanimously, and Germany accounts for about 26.7% of its capital contributions. For France, which has led European integration alongside Germany, requesting approval for assistance would itself carry a political cost. The reform conditions attached to financial assistance are also strict. Recipient countries must agree to spending cuts, tax reforms and other measures and undergo regular implementation reviews; significant deviations from agreed measures can result in subsequent disbursements being withheld. This means France could be forced to implement reforms it has delayed because of domestic opposition under the supervision of its lenders.