France Is
Veering Toward a Potential Debt Crisis, a Warning to the World
French
bond investors are demanding sharply higher interest rates, a cautionary
development for other high-debt countries.
Eshe
Nelson
By Eshe
Nelson
Reporting
from London
https://www.nytimes.com/2026/10/08/business/france-bond-yields.html
Oct. 8,
2026
Updated
2:05 p.m. ET
France
has been engulfed by turmoil, with students out on the streets to protest cuts
at schools. Investors are rebelling against the government, too, by questioning
the country’s ability to manage its huge debt pile.
France
has emerged as the European epicenter of global turmoil in bond markets and
serves as a warning to politicians around the world contending with higher
borrowing costs. It’s a perilous financial backdrop to the protests. On
Thursday, for the second time in a week, high school students and their
supporters came out across France, calling for more teachers and the renovation
of dilapidated school buildings.
Rising
interest rates expose the vulnerability of countries with high debt burdens and
stubborn deficits. When governments must spend more on debt payments, less
money is left for other priorities like improving schools, building more
housing or cutting taxes — and that can push frustrated voters into the streets
or into the arms of populist political parties.
“These
bond yield rises have very real implications,” said Mahmood Pradhan, a
nonresident fellow at Bruegel, a think tank in Brussels, and former deputy
director of the European department at the International Monetary Fund.
In a
nightmare scenario, the dynamics become a self-fulfilling spiral: Politicians
make more promises to appease aggrieved citizens, leading to more borrowing
and, in turn, spooking investors, who demand even higher rates to keep buying
government bonds.
France
shows how quickly the situation can escalate when investor sentiment turns
sour.
A warning
sign for French debt
This
week, the yield on 10-year French bonds nearly touched 5 percent, the highest
rate since 2002. More worrying, another measure of investors’ feelings toward
French debt has attracted fresh attention: the so-called spread between 10-year
yields on French and German government debt. The gap shows the premium traders
are demanding to hold French debt over the alternative from Germany, which is
considered the safest borrower in Europe.
This
spread recently reached its widest disparity since 2012 after an astonishingly
rapid increase this past month. Investors have also demanded higher returns to
lend to France than to Italy and Greece, which were long considered Europe’s
most problematic high-debt nations.
Across
Europe, rising bond yields are testing the resilience of economies. The year
started with low inflation and faster economic growth. But since the war in
Iran began, energy prices have soared, pushing inflation back up and prompting
the European Central Bank to raise interest rates twice this year. Traders
expect another rate increase by the end of the year.
The rise
in borrowing costs leaves governments exposed to new economic shocks like
sudden increases in food and energy prices. It will give them less leeway to
support businesses and households, in ways they have in recent years. “The
limited ability of countries to deal with these shocks is a new world for us,”
Mr. Pradhan said.
In
France, interest payments are one of the biggest expenses in the government’s
budget, and could eat up more than 90 billion euros ($100 billion) next year,
more than planned spending on defense and education, according to the French
finance ministry. Emmanuel Moulin, the governor of the French central bank,
recently told The Financial Times that the country was at risk of being
“strangled by interest rates” if it didn’t improve its public finances.
France’s
incumbent political leaders — and some hopeful contenders — are scrambling to
reassure skeptical investors. But so far, their overtures are having limited
impact. The government said last week that it would aim to shrink its budget
deficit next year, after failing to do so this year. But even then, debt levels
will keep rising. France’s government debt is already nearly 120 percent of the
size of the economy.
Investors
have been tracking budget negotiations in Paris closely, but they expect that
France’s fiscal problems could be intensified by presidential election next
spring. So far all the leading candidates have made big spending promises and
not presented convincing plans to reduce debt. Marine Le Pen, the far-right
front-runner, vowed this week to cut the deficit but didn’t detail how, while
Jean-Luc Mélenchon, the far-left candidate, has alarmed investors by proposing
to cancel some of the country’s debt instead of repaying it.
France
might get “some temporary relief in markets if they can get some measures
passed in parliament,” Mr. Pradhan said. “But beyond that, France has a debt
problem.” The country has large spending needs that have been politically
difficult to restrain, in areas such as pensions, which are compounded by
rising interest payments.
These are
issues shared elsewhere. In some ways, the United States is at the core of the
market tumult. In recent months the yields on U.S. Treasuries, the largest and
most influential bond market in the world, have jumped and triggered a global
sell-off.
The
United States still enjoys plentiful demand for its debt, and one important
factor driving up yields is Silicon Valley’s artificial intelligence boom. But
economists warn that the country is continuing to push the frontier of what
investors might accept from governments if they are seen as unwilling or
unready to tackle rising debt levels. America’s gross national debt topped $40
trillion this summer, or more than 120 percent of the size of the economy,
while annual deficits are set to keep expanding.
In Asia,
Japan’s debt trajectory recently tested the nerve of the market. Japan’s debt
has been more than twice the size of its economy for many years, but recent
government promises to increase spending and cut taxes have punished Japan’s
financial assets. The yen weakened so much that the U.S. Treasury supported an
intervention to bolster the currency, and 10-year Japanese bond yields are
trading at their highest levels in three decades.
The
lesson applies broadly to high-debt countries. Many governments have
drastically increased their borrowing in recent years to support their
economies through a series of shocks, including the Covid-19 pandemic, the 2022
energy crisis after Russia’s full-scale invasion of Ukraine and another energy
shock this year because of the war in Iran. At the same time, public spending
on health care and pensions for aging populations is growing. In the short term
there are also demands, especially in Europe, to spend more on defense.
Global
public debt is near its highest levels since World War II and on track to grow
beyond 100 percent of global gross domestic product, the International Monetary
Fund said on Wednesday. “Advanced economies are the worst offenders,” said
Kristalina Georgieva, the managing director of the Washington-based
organization.
In
Europe, the risk is that the tumult in French bonds could spread to other
eurozone debt markets such as Italy’s and trigger another regional sovereign
debt crisis, reminiscent of the one in 2012.
“The
situation demands an urgent and comprehensive set of policy responses,” Ms.
Georgieva said. Governments need to show credible plans to reduce their
deficits even as many people have come to expect their political leaders to
intervene in the face of economic shocks, she noted. This is normally done
through some combination of reduced spending and higher taxes.
“Some
very tough political choices stare us in the face,” she said.
Eshe
Nelson is a Times reporter based in London, covering economics and business
news.