Deteriorating public finances, compounded by political gridlock, are increasingly alarming bond investors in France, with the nation's borrowing expenses nearing crisis-era peaks as a new round of arduous budgetary negotiations looms on the horizon.
As the second-largest economy in the European Union, France has struggled with recurring political instability and escalating fiscal strain in recent years. The country has repeatedly breached the European Commission's regulations concerning budget deficits and debt ceilings. Several successive prime ministers have attempted to reverse this fiscal decline through reforms, spending cuts, and tax increases, yet all have been unsuccessful, ultimately resulting in their removal from office.
France remains under the EU's excessive deficit procedure, with the European Council recommending that the nation eliminate its excessive shortfall by 2029. However, the country is still far from achieving this objective. The EU treaty outlines reference benchmarks of a government deficit at 3% of gross domestic product (GDP) and public debt at 60% of GDP. Last year, France's deficit stood at 5.1% of GDP, while its debt-to-GDP ratio surpassed 115%.
The International Monetary Fund projected in July that France's total government debt will climb to roughly 118.5% of GDP by 2026, break through 120% in 2027, and remain above that threshold through 2030. Simultaneously, French economic growth remains sluggish, with GDP contracting by 0.2% quarter-on-quarter in the first three months of this year and stagnating entirely in the second quarter.
Political turmoil is placing immense strain on the domestic bond market, driving French government bond yields sharply higher over the past twelve months. This situation has been exacerbated by rising global borrowing costs stemming from the US-Iran conflict, positioning France among the G7 nations with the highest government borrowing expenses. Last week, the yield on France's 10-year government bond touched its highest point since 2008, exceeding 4.13%, and it remained near the 4.1% level by Friday. It is worth noting that bond yields and bond prices move in opposite directions.
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