Bond investors are increasingly treating France as a credit risk, pricing in a higher chance of sovereign default amid worsening fundamentals and political uncertainty, analysts say.
Thierry Wizman, global FX and rates strategist at Macquarie Group, wrote in a note Thursday that the cost of insurance against a French default is now the highest among major EU countries and the U.K.
Early Friday, those signals intensified: France’s five-year sovereign credit default swap rose to 81 basis points, its 10-year bond yield climbed to 4.989%—the highest level since 2002—and the premium over equivalent German yields widened to 152 basis points, the largest gap since the eurozone debt crisis in 2011.
Wizman warned that “the signal from France CDS pricing is that the OAT/Bund spread widening is due to higher sovereign default risk in France.”
Although those measures later eased from peak levels, France’s economic outlook remains fragile. GDP growth is weak, the budget deficit is estimated at about 5.4% of GDP, and rising yields are increasing debt-service costs.
The country’s debt-to-GDP ratio is projected to rise to 122% next year from 119% this year, and investors have shown skepticism about the government’s recent plan, which failed to stop the surge in bond yields.
“But our instinct is to also read the suddenly widening OAT/Bund yield spread as a ‘guilty’ verdict on the recent direction of France’s presidential politics,” Wizman wrote. He highlighted political polarization—driven largely by immigration rather than fiscal debates—and noted that neither the populist Left nor Right are fiscal hawks.
Far-left presidential candidate Jean-Luc Mélenchon has proposed that the central bank cancel its holdings of French debt. Far-right leader Marine Le Pen, who leads in polls, has proposed tax cuts and lowering the retirement age to as low as 60, even as pensions claim an ever-larger share of the budget.
A runoff between Mélenchon and Le Pen is expected next year, with Le Pen’s National Rally (RN) party seen as the likely victor. Wizman said an outright default remains low probability, but an RN-led presidency that adversely affects the 2028 budget and credit-risk perceptions is “a high-probability event, near 50%.”
He also noted that presidential campaigns are only beginning, so debate and rhetoric over France’s debt, potential default risk, and fiscal policy could intensify and further harm perceptions of the country’s creditworthiness.
France is not alone in facing high public debt: the U.S. debt-to-GDP ratio is about 100% and Japan’s exceeds 200%. But the U.S. benefits from stronger GDP growth, and Japan has a large domestic investor base for its debt. By contrast, France’s economy is forecast to grow just 0.5% this year, and the government plans to issue over $380 billion in medium- and long-term debt next year.
Ales Koutny, head of international rates at Vanguard, told the Financial Times that demand for debt “can disappear in times of crisis” in markets that become geopolitical flashpoints, describing France as “long-term degrading credit.”
Credit agencies have also flagged political risks. Scope Ratings cut France’s score to A+ from AA- last month, aligning it with Fitch and S&P Global Ratings. Scope pointed to the government’s struggles to meet self-imposed deficit targets and warned that rising yields will increase borrowing costs, making fiscal adjustments more painful.
“Scope expects political fragmentation to remain elevated beyond the 2027 presidential election, complicating the substantial fiscal consolidation required to stabilize public debt and increasing the risk that measures are diluted, delayed or only partially implemented over coming years,” the agency said. “This weakens Scope’s confidence in France’s ability to halt, let alone reverse the deterioration of its public finances over the medium term.”
This story was originally featured on Fortune.com.
Source: fortune.com
