France's bond market under pressure: government struggles with rising interest rates and budget deficit

Paris. Nervousness is growing in France's bond market - this is becoming a problem for the government in Paris. On Thursday, the interest rate on ten-year government bonds jumped again, approaching the five percent mark. It was now higher than during the financial crisis of 2008.

This means that it is becoming increasingly expensive for France to finance its debts. The government is already expecting almost 80 billion euros for interest this year, and next year it could be more than 91 billion euros. Economics Minister Roland Lescure's appearance on Thursday morning was correspondingly serious when he presented the draft budget for 2027.

“With this budget we want to preserve our maneuvering mass,” he said. The government wants to save 54 billion euros and reduce new debt to five percent.

To achieve this, ministries should save money, social spending should grow more slowly and municipalities should contribute more to reducing the deficit. Specifically, pensions above 1,260 euros per month could rise less than inflation.

The government puts the savings at around four billion euros. A new, staggered levy is expected to cost municipalities 2.5 billion euros. In addition, more checks on sick leave and stricter action against tax and social fraud are planned. The defense budget, on the other hand, is expected to increase by more than six billion euros.

Many other countries around the world are also suffering from rising bond interest rates. Investors are particularly nervous about France. They see a significantly higher risk there than in Germany, for example.

This can be seen in the different yields on French and German government bonds. The risk premium has been rising in France since the summer. While it was less than 70 basis points at the beginning of July, it is now almost 130 basis points - the highest it has been since the 2012 euro crisis.

The comparison with other highly indebted countries is even more remarkable: Italy currently has 106 basis points, Greece 87. The markets therefore rate France as significantly riskier.

An important reason for this is the shaky foundation of the state budget. France is one of the most indebted countries in the EU. As the national statistics institute announced on Tuesday, the debt ratio was 119 percent of gross domestic product at the end of the second quarter. The government expects around 121 percent for the coming year.

As the presidential election campaign begins, resistance to unpopular cuts is growing in Paris. Hardly any party is interested in supporting Prime Minister Sébastien Lecornu with austerity measures. Since Parliament was dissolved in 2024, the government no longer has its own majority. Lecornu relies on votes from the opposition.

At the same time, the pressure from the road increases. The public sector went on strike this week, and numerous high schools across the country have been blocked for several days, and in some cases there has been violence. Further demonstrations have been announced. A nationwide day of action is scheduled for October 17th.

But if the government fails to credibly organize the reduction of the deficit, investors could become even more nervous, the risk premium and interest rates would continue to rise, the budget situation would become more and more precarious and the necessary measures would become more and more drastic.

Goldman Sachs warns of a self-reinforcing dynamic: “Higher debt could lead to higher interest rates, weaker growth and ultimately even higher debt,” writes analyst Alexandre Stott. He expects France's debt ratio to rise to 125 percent of GDP by the early 2030s.

The situation is further exacerbated by the fact that it is uncertain whether the economic recovery expected by the government will actually materialize. She had just had to reduce the growth forecast for gross domestic product for this year to 0.5 percent.

It expects economic growth of one percent for 2027. At the same time, Economics Minister Roland Lescure pointed out the uncertainty and volatility of the international situation when presenting the budget: “This is a clearly identified risk.”

In an attempt to reassure, he emphasized the government's creditworthiness: "France's credit rating is solid," he said on Thursday. The country has no problems taking out loans. Although it has become more expensive, there are no problems with placement.

It remains to be seen whether the government will be able to achieve relief with the budget for 2027. The Socialists and the left-wing party “La France insoumise” (LFI) are already threatening a motion of no confidence. Last year, an agreement on the budget was only possible because the pension reform was suspended.

In addition, the upcoming presidential election is increasing the uncertain situation. Several possible candidates represent positions that could raise new doubts in the markets about France's fiscal reliability.

LFI frontman Jean-Luc Mélenchon, who has a chance of making it into the presidential runoff next year, suggested canceling part of France's debt. ECB President Christine Lagarde sharply rejected this. Such a move could shake market confidence in France and make it more difficult for the country to borrow in the future.

Even if Parliament approves the savings announced on Thursday, they are already subject to reservations. Budget Minister David Amiel emphasizes that the measures are reversible: “The next government can, if they want, reverse them in their first week in office.”