France debt stress pushes bond yields near 2008 highs

France is emerging as a focal point for sovereign debt concerns in Europe as investors reassess its public finances and political stability. The country’s borrowing costs have climbed to levels not seen since the global financial crisis, underscoring the strain in its bond market.

Deficit rules are still a long way off

France remains under the European Union’s excessive deficit procedure after repeatedly missing the bloc’s budget benchmarks. EU rules set reference points of 3% of GDP for deficits and 60% for public debt, but France’s deficit reached 5.1% of GDP last year and its debt ratio rose above 115%.

The International Monetary Fund projected in July that France’s gross government debt will rise to about 118.5% of GDP in 2026 and move above 120% in 2027, staying there through 2030. That path leaves little room for policy mistakes as Paris heads into another difficult budget debate.

Political turmoil has made the fiscal challenge harder to manage. Successive prime ministers have fallen after failing to secure support for spending cuts, tax rises and other measures aimed at stabilizing the public finances.

Bond investors are demanding a higher premium

Market pressure has been visible in French government bonds, where yields have risen sharply over the past year. French 10-year borrowing costs briefly moved above 4.13% last week, their highest level since 2008, and stayed close to 4.1% on Friday.

That puts France among the most expensive sovereign borrowers in the Group of Seven. Higher yields mean the state must pay more to finance itself, which can worsen the budget outlook when growth is already weak.

The economy is not providing much support. Output contracted by 0.2% quarter-on-quarter in the first three months of the year and was flat in the second quarter, leaving debt dynamics exposed to any further slowdown.

For bond investors, the combination of weak growth, large deficits and repeated political deadlock has turned France into a warning sign for euro zone fiscal risks. With another budget confrontation approaching, the country’s ability to restore confidence will remain in focus.

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