France's debt reckoning: bond yields hit 24-year high as 'magic money' era ends

Government bond yields at highest since 2002

Runaway welfare spending balloons deficit

Political paralysis fuels populist spending pledges

Doubts grow over France's ability to fix its finances

French President Emmanuel Macron participates in the first test launch of a new intercontinental ballistic missile near the western coast of Finistère on Tuesday (local time). [AFP]

France, once the anchor of the European economy, has become its problem child. A surge in national debt and soaring government bond yields have made it the most vulnerable link in the European financial chain. The country that was once a safe haven in European markets is now borrowing at higher rates than Greece and Italy — the very countries at the center of past debt crises.

French bonds shunned as yields hit 24-year high

France's 10-year government bond yield stood at 4.85 percent on Friday (local time). It had touched 4.9 percent on Tuesday, approaching the 5 percent mark — the highest level since 2002.

Investors are bracing for further deterioration. France borrowed heavily during the era of ultra-low interest rates, and now that those debts are coming due for refinancing, rising rates are rapidly inflating the government's interest burden. More than $1 trillion in French government bonds will mature by 2030. Next year alone, France must issue a record roughly $380 billion in new debt — yet the investors who once provided reliable demand are pulling back.

The Bank of France has stopped buying government bonds and is shrinking its portfolio by letting maturing holdings roll off without reinvestment. Japanese asset managers, once steady buyers of French debt, have also stepped away, and the hedge funds that moved in to fill the gap have suffered losses amid extreme recent volatility.

Kevin Thozet, a portfolio adviser at French asset manager Carmignac, said France had been "a free rider in Europe for years, maybe decades, getting away with all kinds of fiscal irresponsibility." He added: "It worked as long as people didn't notice — but now they're starting to."

A study recently commissioned by the French Treasury found that the government's debt interest costs are projected to rise 59 percent by 2030. Debt servicing is already one of the largest single items in government expenditure and could surpass military spending by around 2030. Bank of France Governor Emmanuel Moulin recently warned that France was in a state of "slow strangulation."

The French National Assembly in Paris. [Reuters]

Decades of welfare spending send national debt soaring

France's economic troubles extend beyond interest costs to the sheer scale of its debt. The national debt is approaching 120 percent of GDP. Among major advanced economies, only the United States runs a larger fiscal deficit.

The debt problem is rooted in decades of excessive spending to maintain an expansive welfare system, entrenching a public expectation that the state will step in with public funds at every crisis. Sylvain Maillard, a lawmaker from President Emmanuel Macron's centrist party, said France had "always had a reflexive habit of asking the state for a little 'magic money'" — a cycle of "pay up, pay up, pay up again."

Macron repeatedly turned to public spending to manage each successive crisis. It began with at least 10 billion euros ($11.2 billion) disbursed to quell the violent "Yellow Vest" protests. Large-scale support packages followed during the COVID-19 pandemic and the energy crisis triggered by the war in Ukraine. After Russia's invasion, tens of billions of euros were poured into energy price caps — and the subsidies continued even after gas supplies stabilized. Jean-François Husson, a conservative lawmaker who led a Senate investigation, said "enormous amounts of public money were deployed, but no one inside the government had the courage to pull the plug."

An unprecedented mix of stimulus, inflation and post-pandemic demand swings caused the economic forecasting models the French Treasury relied on for annual budgeting to break down. The scale of the distortion became apparent from 2023, as the Macron government began unwinding its support measures. The fiscal deficit widened to 5.5 percent of GDP that year — well above the EU's 3 percent ceiling — and expanded further to 5.8 percent of GDP in 2024.

Political paralysis raises doubts over France's ability to fix its finances

Marine Le Pen, presidential candidate of the far-right National Rally party. [AFP]

Compounding the problem, France's deeply fractured political landscape has fueled doubts about whether the country can address its economic difficulties at all. In recent years, a divided National Assembly has repeatedly ousted prime ministers who attempted to restore fiscal order through spending cuts. With a presidential election due next spring, leading candidates are instead competing to outdo each other with pledges to spend more.

Marine Le Pen, who leads in polling, has pledged to lower the minimum retirement age to 60 — a policy she estimates would require an additional 9 billion euros a year. Her far-left rival Jean-Luc Mélenchon has called on the ECB to freeze or cancel the 488 billion euros in French government bonds held by the Bank of France. "Throw them in the fire," Mélenchon said.

After Le Pen's camp swept European Parliament elections in June, Macron dissolved the National Assembly and called a snap general election — but his party lost its majority. With parliament now split among three blocs — Le Pen's camp, the ruling coalition and a left-wing alliance — the annual budget process has descended into recurring chaos.

France's fiscal deficit has exceeded 5 percent of GDP for three consecutive years, and a Treasury report warns it could reach 6.8 percent of GDP by 2030. Rising interest rates, partly driven by the war involving Iran, have put heavily indebted countries in investors' crosshairs. Thozet said the average interest rate applied to France's entire national debt would outpace economic growth over the coming years. "When that happens, debt keeps growing unless you make very deep spending cuts," he said.

mokiya@heraldcorp.com