France's debt alarm bells

France's borrowing costs are surging as investors worry about a full-blown public debt crisis in the EU's second-largest economy. Stress is spreading beyond its borders.

Thirty years without balance

France has not run a balanced budget in more than thirty years. It has not kept its budget deficit within EU limits since two thousand nineteen due to pension costs, rearmament and green transition spending.

The bond spread widens fast

The premium investors demand to hold ten-year French bonds over German ones rose from zero point fifty-five percentage points in mid-September to one point forty-five by Monday morning. It has not been that high since two thousand twelve.

French yields hit fifteen-year high

The French ten-year bond yield is nearly at five percent, the highest it has been since two thousand eight. Bank of France Governor Emmanuel Moulin warned that everything must be done to avert a debt crisis ahead of the two thousand twenty-seven presidential election.

“everything must be done to avert a debt crisis”

Contagion spreads across Europe

Sovereign yield spreads have widened for Italy, Belgium and Greece. The euro hit a seventeen-month low against the dollar on Monday as markets turn more negative on Europe in general.

Foreign investors heading for exits

More than half of French debt is held by foreign investors who tend to leave faster when things become shaky. Sumitomo Mitsui DS Asset Management, one of Japan's largest asset managers, sold all its French debt over the weekend.

ECB's limited rescue toolkit

The European Central Bank's Transmission Protection Instrument allows it to buy government bonds to counter disorderly market dynamics, but only if a country pursues sound fiscal policies. France would need big adjustment measures that are nearly impossible ahead of two thousand twenty-seven elections.

“Help would likely require real commitment to stability, through fiscal discipline, reforms or both. Getting that support won't be easy politically.”

Pausing quantitative tightening option

The ECB could pause quantitative tightening and reinvest maturing bonds flexibly to send a positive signal to bond markets. Carsten Brzeski of ING and former ECB board member Lorenzo Bini Smaghi have both suggested this approach.

Interest rates as last resort

The ECB could use interest rates to keep borrowing costs down if the wider region is affected. Markets have scaled back bets on additional tightening, but ECB President Christine Lagarde left the door open to further hikes with eurozone inflation at three point eight percent in September.

The euro's survival at stake

Brookings Institution Senior Fellow Robin Brooks says the ECB cannot rush into every bailout but will ultimately support France if necessary to keep the euro together, even at the cost of outright horror in Germany and Northern Europe.

“There's got to be a period of demurral, like a debutante at the ball playing hard to get.”