As France tries to restore order to the public finances and the streets, the government faces a significant financial challenge: an unusual reliance on foreign investors who no longer have a strong reason to come to its rescue.
More than most other major economies, the French government depends on overseas lenders, especially in Japan, to fund its deficit. Almost 55% of French debt was owned outside the country last year, according to the European Union's data service. In the U.S., the figure stood at 31% and in Japan, 13%.
For years, foreigners loved France's debt market, one of the world's biggest. The bonds were easy to trade and yielded a bit more than other economies, but were perceived as safe, backed up by the European Union's second-largest economy. Whenever yields rose, foreigners would swoop in to take advantage of the higher returns on offer.
This time feels different. The foreign capital that finances France may be going into reverse, investors say, a factor in a fall selloff that worsened after riots last weekend.
"I rank it as a big vulnerability in France," said Claus Vistesen, chief eurozone economist at research firm Pantheon Macroeconomics. "Because Japan's domestic yields are now so high, there is this idea that money will go home."
It is unclear yet from official data, which have a lag, how investors outside France have behaved during the recent volatility. But some money managers and analysts say severe uncertainty about French budget negotiations and next year's national elections will give overseas lenders pause for thought about buying more bonds, or encourage some to sell.
Another reason: There are now tempting options beyond France, especially in Japan, where investors no longer need to hunt for yields abroad after a long stretch of ultralow rates.
French bonds began to suffer in early September, fueled at first by a global rise in yields that focused attention on weak links in debt markets. Pressure built with poorly received plans to reduce the deficit, and again this week after riots that could make it even harder for the government to cut spending.
Ten-year French bond yields surpassed 5% for the first time since 2002 this week and continued rising Thursday. Their spread over equivalent German bunds, Europe's go-to safe asset, hasn't been so wide since 2011, during one of the worst phases of the eurozone crisis. The spread has surpassed 1.6 percentage points, more than double where it started the year.
Pimco, the debt investor owned by German insurer Allianz, is among the ranks of cautious lenders. Portfolio manager Konstantin Veit says that is unlikely to change unless elected officials show a credible plan to reduce the deficit, which stood at 5.1% of gross domestic product in 2025.
"One issue that isn't confined to France is that you find good yields everywhere," Veit said.
Overseas ownership can be a strength in that it reduces the linkages between France's own financial system and its bonds. Large holdings of government debt by domestic banks worsened Italy's financial dramas in the 2010s.
The flip side is that private investors abroad are more likely than home lenders to step away, and they have a longer menu of places where they can invest. Repatriation of capital contributed to international bond panics in 1994 and again during the eurozone crisis, Britain's fiscal watchdog said in a 2023 report.
These days, higher yields make Japan and Germany look particularly alluring.
Pantheon's Vistesen last year estimated that Japanese investors owned between 10% and 15% of France's debt. In total, Barclays analyst Rohan Khanna estimates, 31% of French debt is held outside the eurozone and 24% in other members of the single-currency bloc.
He says Ministry of Finance data suggest Japanese investors added to their French bondholdings in the three months through August, just before the selloff began.
One big group has already cut back, however. Japanese life insurers reduced their French holdings after the European Central Bank raised interest rates in 2022, which made it more expensive to hedge against currency moves, Citigroup analyst Tomohisa Fujiki said in a recent note. He expects more "gradual repatriation" now that Japanese rates have risen.
Another major owner, the ECB, splurged on eurozone government debt in the 2010s and again during the Covid pandemic as part of its quantitative-easing program. It has unwound those holdings since 2023 in a process known as quantitative tightening.
French banks are in good financial health and have a relatively small portion of their own government's debt, giving them room to step in and buy, said Veit. That could, however, reduce their ability to lend to companies or consumers.
Moody's is expected by investors on Friday to downgrade France's credit rating, while retaining the country's investment-grade status. Investors say that is unlikely to move bond yields immediately. But it could encourage some conservative players, such as central-bank reserve managers, to stop buying.
Any further selloff will make it harder for France to persuade investors it can improve its finances. It has a substantial deficit to fund. And it needs to pay back maturing bonds issued when rates were near 0% with newly issued securities yielding much more.
France has more than $1 trillion in debt coming due by 2030. Next year it is set to sell a record of about $380 billion in bonds.
"It is just a really difficult situation," said Vistesen. The government can probably muddle through if it gets the deficit down to 4% of GDP, he said, but the market will keep punishing it at 5%.
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