Much like the Samuel Beckett characters left vainly ‘Waiting for Godot’ , investors seem to have given up hope that a spontaneous improvement in public finances would solve France’s fiscal conundrum.
For a long time, French debt benefited from a comfortable paradox – steadily deteriorating public finances, yet only limited market punishment – but this period appears to be drawing to a close.
The signal lies not so much in the absolute level of interest rates as in the widening gap with Germany, in the composition of French debtholders and, more fundamentally, in the potential evolution of marginal demand for French debt. The determining factor is not merely the level of debt but its future trajectory.
This is where the equation becomes more complex for France: high debt, a persistent primary deficit, moderate nominal growth and more expensive refinancing are gradually weakening the fiscal trajectory. Time, long an ally of debtors, is progressively ceasing to be so, as older debt is gradually replaced by more expensive debt.
True barometer of confidence
This raises interest payments further and progressively turns a problem of debt stock into concerns over the future dynamics of public finances. More broadly, France, Belgium and Italy appear to be the countries most exposed to this issue.
The yield on the 10-year French government bond is hovering around 4.8% – compared with approximately 3.7% three months earlier – yet the absolute level of rates does not tell the whole story, particularly as the rise in yields is widespread.
Rather, the spread with Germany has become the true barometer of confidence. The spread between the German Bund and its French counterpart the Obligations Assimilables du Trésor or ‘OAT’, has reached its widest level since the eurozone crisis of the early 2010s, rising above 100 basis points.
Another particularly unusual signal has come from the comparison with Italy. In August, the entire French yield curve moved above the Italian yield curve across all maturities. Clearly, this is not to suggest Italian debt should be considered a risk-free asset – Italy’s debt level remains higher than France’s – but this convergence reflects a shift in risk perception. Investors are now demanding from France a yield closer to that required from Italy.
“The rise in France's interest burden will be neither immediate nor dramatic – it will be gradual, but difficult to reverse in the absence of fiscal consolidation.
In a fragmented political landscape, the question will be less about whether Paris can finance itself than about the cost at which it will be able to continue doing so.”
France is approaching its 2026/27 budgetary and electoral cycle in a particularly delicate position. Beyond the adoption of the 2026 budget, it is now the country’s ability to set out a credible path for public finances that is capturing investors’ attention.
In a fragmented political landscape, the question will be less about whether Paris can finance itself than about the cost at which it will be able to continue doing so – and whether the outcome of the presidential election will, at the very least, stabilise a public debt-to-GDP ratio now close to 120%.
According to available estimates, France’s public deficit is expected to reach 5.4% of GDP in 2026 – the highest level in the eurozone. It is expected to remain virtually unchanged in 2027 – at 5.22% of GDP – and this persistent imbalance is fuelling a concerning dynamic. Between 2015 and 2025, France’s debt-to-GDP ratio is expected to have risen by 19.4 percentage points – including five percentage points since 2022.
Yet, for many European partners, 2022 marked the end of the exceptional debt cycle that began during the Covid-19 pandemic. France, for its part, has not embarked on the same path of debt reduction. Its public debt is expected to stand at around 120% of GDP in 2026 – compared with an average of 91% for the eurozone as a whole.
The risk appears all the more asymmetric as forecasts are based on the assumption of a minimum degree of political continuity. Without new measures, the 2026 deficit is expected to stand at 5.2% of GDP, according to the Banque de France.
The absence of a parliamentary agreement on the 2027 budget, leading to its rollover under a special law, could further worsen the situation, however, and push the deficit towards 5.5% of GDP, according to the European Commission under an unchanged-policy scenario.
The adoption of a budget remains possible. The National Rally, for example, could be encouraged to adopt a more conciliatory stance – both to project an image of responsibility and to avoid inheriting, should it come to power, an even more deteriorated fiscal situation.
Indeed, an abstention by the National Rally would make it possible to have a budget in place should it wish to implement its programme in the event of a possible victory – otherwise, the next executive would have to wait until autumn 2027 to introduce its measures.
French fragility
This French fragility contrasts with developments in parts of the European periphery. Alongside Belgium, France now appears relatively isolated among the major economies of the eurozone. Ireland, for example, has regained an AA rating and is once again regarded by the markets as a core eurozone country.
Cyprus, Greece, Portugal, Slovenia and Spain have also seen their risk perception improve, as their debt ratios have fallen and their ratings have moved closer to those of the strongest economies, while Italy – despite still having a very high debt level – has managed to stabilise its trajectory. For its part, Greece, long a symbol of the European crisis, is engaged in a debt-reduction process that could soon bring its debt-to-GDP ratio below that of Italy.
The core of the French problem lies in the primary balance – that is to say, the balance of public accounts before interest payments on the debt. This is expected to remain negative at 3.68% of GDP in 2026. In other words, even without taking the interest burden into account, public expenditure would still significantly exceed revenues. In an economy with moderate growth, this situation makes it very difficult to stabilise debt without significant fiscal effort.
France does, admittedly, retain a significant buffer. The average coupon on its debt – estimated at 2.1% – remains well below the rates currently demanded by the markets. The average maturity, close to nine years, slows the pass-through of rising interest rates to the overall cost of government borrowing.
This protection is, however, temporary. As older securities mature, they must be refinanced on more expensive terms. The rise in the interest burden will therefore be neither immediate nor dramatic – it will be gradual, but difficult to reverse in the absence of fiscal consolidation.
Decisive milestone
The budget debate in October and November will be a decisive milestone. In particular, markets will be watching: the likelihood of a budget being adopted; the positions of the National Rally and the Socialist Party – especially with regard to abstention or non-censure; the nature and scale of the proposed fiscal adjustment measures; and the government’s ability to secure a majority, or at least a majority of convenience.
Uncertainty is also heightened by the lack of clarity surrounding political programmes – particularly that of the National Rally. Its 2025 budget proposal rests on substantial savings, but these are considered to lack credibility and are surrounded by considerable uncertainty.
Question marks here include a reduction in France’s contribution to the European Union, the costs of its pension reform, immigration-related measures and taxation of share buybacks – not to mention more than €30bn (£25.7bn) in unspecified savings or additional revenues. The National Rally’s 2026 budget proposals are expected in early October.
To be clear, the issue here is not one of systemic risk – France is not on the brink of default. It is neither Greece in 2012 nor Italy in 2011. Its economy is diversified, private savings are substantial, its banks are sound and its debt market is deep.
Nevertheless, the barely visible danger is that of a sustained rise in borrowing costs, which would gradually reduce the room for manoeuvre available to both the government and the economy. Credibility must therefore be rebuilt in an environment where investors are increasingly comparing fiscal trajectories rather than merely debt levels.
Michaël Nizard is global head of asset allocation research at Edmond de Rothschild Asset Management
