Investors are increasingly wary of French government bonds, driving yields above those of their Spanish counterparts for the first time in over a decade. What’s behind this shift in sentiment? France’s debt burden is staggering, with a ratio of government debt to GDP reaching 106%, on par with Belgium and Spain, and only surpassed by Greece and Italy. However, when private sector debt is factored in, France takes the top spot in the Eurozone.
Unlike its peers, France’s debt has continued to climb in recent years, with total debt-to-GDP swelling from 287% to 315% over the past decade. In contrast, Spain has made significant progress, reducing its debt burden from 311% to 232% during the same period.
France’s large budget deficits, equivalent to 5.5% of GDP, are a major contributor to its growing debt. The lack of a clear majority in the National Assembly hinders the implementation of policies that could alter the country’s fiscal course. This uncertainty may lead to further widening of the spread between French OATs and German Bunds, potentially triggering a debt spiral where increased financing costs stifle economic growth, driving debt ratios even higher.
However, the European Central Bank’s recent rate cuts offer a glimmer of hope, as they will reduce financing costs across the Eurozone, including in France. This could provide some respite for the country’s struggling economy and debt-ridden government.
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