France was once viewed as one of Europe’s safest sovereign borrowers, with its bonds carrying little more risk than Germany’s.
That confidence is now being eroded as investors demand a growing premium to finance the country’s mounting debt.
French 10-year borrowing costs rose to 5% last week, their highest level since July 2002.
The premium investors demand to hold French government bonds rather than German debt has also climbed to its highest level since the eurozone debt crisis of 2011-2012.
For years, the premium on 10-year French bonds over German debt measured in mere basis points.
That spread has widened sharply, rising from 0.55 percentage points in mid-September to 1.45 points by Monday morning — its highest level since the 2012 eurozone debt crisis.
The selloff has begun spilling into other markets.
The euro fell to a 17-month low against the dollar on Monday, while borrowing costs in other heavily indebted European economies, including Italy, Belgium and Greece, have also started to rise.
At the heart of the problem is France’s deteriorating fiscal position.
The government is spending substantially more than it collects in taxes, leaving it dependent on borrowing to finance the gap.
France’s debt problem reaches a critical point
France’s budget deficit is expected to reach 5.4% of GDP this year, far above the European Union’s 3% limit.
The country has not balanced its budget in more than three decades and has failed to meet the EU deficit target since 2019.
Structural pressures have made the problem increasingly difficult to reverse.
An expensive pension system, rising defence spending and the costs of the green transition have all placed additional demands on government finances.
French public debt reached €3.6 trillion in the second quarter of 2026, equivalent to 119% of GDP, according to the national statistics agency INSEE.
That compares with 115.6% a year earlier.
The pressures were already mounting before the war in Iran.
The conflict has added to the strain by pushing up energy costs and weighing on economic growth.
The growing concern among investors is not simply that France has accumulated a large debt burden, but that its political system may make it increasingly difficult to implement the spending cuts and tax increases needed to stabilise it.
France faces a presidential election, while a hung parliament has made governing more difficult.
Marine Le Pen’s far-right National Rally party is also gaining ground, potentially making politically unpopular fiscal consolidation even harder.
Paris offers a deficit-cutting plan but markets unconvinced
Prime Minister Sébastien Lecornu’s minority government presented its draft 2027 budget last Thursday, seeking to reassure markets that France can bring its finances under control.
The plan calls for roughly €54 billion in spending reductions and additional revenue and targets a deficit of 5% of GDP next year, compared with 5.4% in 2026.
About two-thirds of the adjustment would come from spending restraint, while the remainder would be raised through higher taxes and contributions.
The government has proposed around €6 billion of savings each from pensions and healthcare.
Government spending excluding interest payments and defence would also be frozen in cash terms, effectively squeezing budgets as prices continue to rise.
But investors remain unconvinced that the government can deliver the promised savings, particularly with elections approaching.
“It just seems to me like the market is rejecting this 2027 budget. There’s an election coming up … who’s going to vote for fiscal austerity with elections coming up?” said Erik Bregar, director of FX and precious metals risk management at Silver Gold Bull in Toronto in a Reuters report.
Stéphane Colliac, an economist at BNP Paribas, noted that France had already missed its budget targets in three of the four years between 2023 and 2026.
The scale of the adjustment required is also growing.
With interest payments and defence spending both increasing, Colliac estimates that the government needs to find savings equivalent to about 1% of GDP simply to reduce the deficit by 0.4 percentage points.
More borrowing is coming
France’s fiscal challenge is compounded by the amount of debt it must issue.
The French Treasury plans to sell €340 billion of debt in 2027, €20 billion more than this year, as pandemic-era borrowing comes due.
That increase means France will need to find substantial demand for its bonds at a time when investors are already demanding higher yields.
Even if the government’s plans are fully implemented, Colliac expects French debt to rise to 121% of GDP in 2027 and eventually stabilise at around 124% in 2032.
That trajectory has intensified concerns about debt sustainability.
Higher yields mean the government must devote an increasing share of its budget to interest payments, leaving less room for public investment and other spending.
Interest payments are expected to rise from €79.2 billion in 2026 to €91.2 billion in 2027 under the government’s budget projections.
The dynamic can become self-reinforcing: larger debt increases borrowing costs, higher borrowing costs increase interest payments, and higher interest payments make it harder to bring down the deficit.
Fears of a wider European contagion
For now, France remains the biggest source of concern.
But markets are increasingly signalling that the problem may not remain confined to Paris.
Italian and Greek spreads over German Bunds widened by almost 15 basis points during the recent French turmoil, according to ING strategists Michiel Tukker and Benjamin Schroeder.
“Debt dynamics are no longer deemed only a French problem,” they wrote.
The move is significant because German government bonds are generally treated as the benchmark for eurozone sovereign debt.
When investors demand a greater premium from other governments, it signals a reassessment of the risk attached to their finances.
“Government bond yields in France are spiralling out of control. Contagion to the rest of high-debt Europe is unfolding rapidly,” wrote Robin J Brooks, former chief economist at the IIF and former chief FX strategist at Goldman Sachs.
Currency markets are reflecting those concerns.
Experts warn that mounting French fiscal concerns could push the euro towards $1.10.
ECB faces a difficult choice
The deteriorating bond market presents the European Central Bank with an uncomfortable policy dilemma.
The ECB must balance concerns over inflation against the risk that rising sovereign yields could destabilise financial markets and further weaken the euro.
Eurozone inflation rose to 3.8% in September, strengthening the case for tighter monetary policy.
At the same time, the selloff in government bonds has increased calls for the central bank to pause its quantitative tightening programme or intervene if market stress becomes severe.
“There can be absolutely no suspense on how this ends. The ECB will intervene to cap yields. It’ll do so because it thinks sovereign debt defaults are an existential threat to the Euro and therefore its own survival,” Brooks wrote.
ING global head of macro research Carsten Brzeski said the ECB could “pause quantitative tightening temporarily and reinvest maturing bonds in its portfolio ‘flexibly,’ sending a positive signal to bond markets.”
The idea was also raised in an opinion article by Lorenzo Bini Smaghi, a former ECB board member.
French far-left presidential candidate Jean-Luc Mélenchon has separately called for the ECB to put part of government debt “in the freezer.”
But intervention would carry its own risks.
A central bank response could ease pressure on bond markets while potentially weakening the ECB’s credibility at a time when inflation remains above target.
Ricardo Amaro, lead eurozone economist at Oxford Economics, said the ECB needs to act carefully.
“Sounding too hawkish would also add to pressure on France’s bond yields, which became an important driver of euro weakness,” he told DW.
Amaro expects policymakers to continue monitoring developments in the euro-dollar exchange rate but stop short of trying to influence the currency market for now.
A leadership change at the ECB is also approaching, potentially complicating the central bank’s response and raising the threshold for intervention.
2012 fears return, but not everyone is convinced
The market turmoil has revived memories of the sovereign debt crisis that threatened the survival of the eurozone roughly 15 years ago.
But some investors believe comparisons with that period are exaggerated.
“Comparisons to 2012 are well off the mark,” said Geoffrey Yu, a senior strategist at BNY.
The eurozone today has stronger institutional safeguards and a more established framework for dealing with sovereign stress than it did during the 2011-2012 crisis.
Yet the underlying challenge remains serious.
France is a much larger economy than Greece was during the earlier crisis, meaning any sustained deterioration in its bond market could have much broader implications for European financial conditions.
Amaro said the combination of expected ECB rate increases and a worsening inflation outlook means the situation requires close monitoring.
“Euro weakness shouldn’t be interpreted as an isolated development,” he said.
“If triggered by growing concerns about France’s fiscal outlook, then the ECB would certainly want to thread that carefully given risks for the eurozone.”
The immediate question is whether France can convince investors that its fiscal deterioration is reversible.
The government’s 2027 budget is an attempt to do so, but the market’s reaction suggests that credibility is becoming as important as the numbers themselves.
For now, France is not facing a sovereign default.
But the rapid rise in borrowing costs shows that markets are no longer willing to treat its fiscal position as a problem that can simply be deferred.
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