Since October 1, France’s 10-year government bond yield has eased somewhat, but it remains elevated at 4.84 percent. Compared with 3.53 percent in June, it represents an increase of more than 1.3 percentage points over the past four months – a significant source of concern for investors.
France is facing a multitude of challenges, including its fiscal deficit, the public’s reliance on social welfare, immigration policy, and the approaching general election. With the current government facing political constraints, implementing measures to raise revenue or cut spending to address the fiscal problems has become increasingly difficult. These factors have been among the main drivers of the sustained decline in French bond prices over recent months. However, one factor that is often overlooked is the unresolved fiscal legacy of the Covid-19 pandemic, which remains a major contributor to France’s current fiscal crisis.
France’s debt management agency, Agence France Tresor, recently indicated that it plans to borrow a record 340 billion euros (HK$2.99 trillion) in 2027, approximately 28 billion euros more than this year. A key reason is that a substantial volume of bonds issued during the Covid-19 period will mature next year, sharply increasing the government’s debt repayment and refinancing requirements. With French bond yields already at their highest levels since 2008, a further increase in borrowing next year could place even greater strain on the country’s public finances.
This illustrates how the Covid-19 pandemic forced France to substantially increase borrowing to finance subsidies, welfare payments, and other support measures. Yet, four years later, the country has evidently failed to generate sufficient economic growth and revenue to put its public finances on a more sustainable footing. Instead, continued dependence on welfare spending has made it difficult to reduce the fiscal burden.
Consequently, the debt problem has not only persisted but deteriorated. Public opposition to potential welfare cuts as part of the government’s efforts to address the fiscal deficit has also contributed to large-scale protests and civil unrest in recent days. This underscores how difficult it will be for France to resolve the debt burden inherited from the Covid-19 crisis.
But France is not the only country that has failed to adequately address the debt accumulated during the pandemic over the past four years. With US Treasury yields remaining elevated and France’s fiscal difficulties coming increasingly to the fore, contagion across global bond markets could trigger further selloffs in European and emerging-market sovereign debt. This, in turn, could introduce greater uncertainty into global financial markets over the remainder of this year.
Andrew Wong is a veteran independent commentator
