Something happened in the bond market at the start of this month that we haven’t seen in over a decade, and it involves one of the most important countries in the world.
France isn’t some peripheral player like Greece. It’s a founding member of the European Union and the second largest economy in the Eurozone after Germany, accounting for nearly a fifth of the Eurozone’s output. Since Brexit, it’s the EU’s only nuclear power and its only permanent member of the UN Security Council. Along with Germany, France is one of the two pillars the entire euro project rests on.
It’s also the EU’s biggest debtor. At nearly €3.6 trillion, France owes more than any other country in the bloc, including Italy and Germany. When Greece nearly broke the Eurozone in 2010, its debt was roughly €330 billion. France’s is about ten times that. The Eurozone’s bailout fund, the European Stability Mechanism, can lend a maximum of €500 billion. The rescue machinery Europe built during the last crisis was never designed for a country this size.
On October 2, the spread between French and German 10-year government bonds blew out to roughly 150 basis points. That’s the widest gap since the 2011 Eurozone debt crisis, when Greece, Italy and Spain were all on the brink.
Today, France trades WIDER than Italy (about 90 basis points) and Greece (about 76 basis points). Put another way, the bond market now views the second largest economy in the Eurozone as a riskier borrower than Greece.
It gets better. As of October 8, roughly €215 billion worth of French investment grade corporate bonds were yielding LESS than comparable French government bonds. Investors would rather lend to French companies than to the French state.
The spread has eased a bit since then. It was about 132 basis points as of last Friday. But don’t let that fool you. France’s problems are structural, and as I’ll explain shortly, the country has no realistic way to fix them.
Let’s start with the numbers.
As of the end of the second quarter, France’s public debt stood at nearly €3.6 trillion, or 119% of GDP. That’s the highest level since 1946, when the country was rebuilding from World War II. The government’s own budget projects debt will hit 121.7% of GDP next year.
France is running a budget deficit of 5.4% of GDP this year, one of the largest in the European Union. The last time France balanced its budget was 1973. Richard Nixon was President.
Next year, France will borrow a record €340 billion, €28 billion more than this year, to fund its deficit and roll over its maturing debt.
And the cost of carrying that debt is climbing fast. The French state’s interest bill is projected to rise from €64.8 billion this year to €74.2 billion in 2027. Interest on the debt is now the single largest spending item in the state budget, ahead of education.
Here’s the part most analysts miss. The average maturity of French government debt is about eight and a half years. That means the debt France issued at near zero rates in the 2010s and early 2020s is only gradually being rolled over at today’s much higher rates. The interest burden has years of increases already baked in.
So why can’t France fix this?
First, France can’t print its own money. The Banque de France doesn’t set French monetary policy. The European Central Bank (ECB) does. When the U.S. or Japan runs into a debt jam, their central banks can buy government bonds to keep yields in check. France gave up that option when it adopted the euro.
The ECB does have a tool for exactly this kind of situation. It’s called the Transmission Protection Instrument (TPI), and it allows the ECB to buy a member country’s bonds if spreads blow out for reasons that aren’t justified by fundamentals. But there’s a catch. A country is only eligible if it is following the EU’s fiscal rules. France has been under an EU excessive deficit procedure since July 2024, which means it fails one of the ECB’s key criteria for a rescue. The TPI has never been used, and no ECB policymaker has suggested using it for France.
Second, France can’t cut its way out. Prime Minister Sébastien Lecornu runs a minority government. On October 1, it unveiled a 2027 budget with €43 billion in spending cuts and revenue measures, targeting a deficit of 5% of GDP. Lecornu himself has warned that without savings, the 2027 deficit would approach 6.5% of GDP.
Getting that budget through parliament is another matter. Public sector workers have already gone on strike over a proposed pay freeze. Last year, the government agreed to suspend Macron’s signature pension reform just to survive, a move that helped push S&P to downgrade France to A+. Fitch had already cut France to A+ the month before.
Then there’s politics. France holds a presidential election next year, and polls suggest the far right could win it. Few politicians are going to campaign on cutting pensions and healthcare in a country where public spending accounts for more than half of GDP.
Third, France can’t tax its way out. France already has one of the heaviest tax burdens in the developed world, and this year’s budget leaned on exceptional taxes on very high earners, large companies and family holding companies. There is only so much more you can squeeze before capital and talent start to leave.
Fourth, France can’t grow its way out. The Banque de France expects the economy to grow just 0.5% this year. With growth that weak and a deficit above 5% of GDP, the debt keeps growing faster than the economy that has to support it.
And there’s a fifth problem: France doesn’t control who owns its debt. Close to 57% of French government debt is held by non-residents. Foreign investors have no political loyalty to Paris. If they decide the risk isn’t worth it, they sell. Every sale pushes yields higher, which makes the math worse, which triggers more selling.
Put simply, France is stuck. It can’t print, it can’t cut, it can’t tax, and it can’t grow. That leaves the bond market to decide the outcome.
Now, I’m not saying France is going to default next month. But France is the first major developed economy where the bond market has clearly started to price in the reality that its debt can’t be paid down on current terms.
And it won’t be the last.
France isn’t even running the biggest deficit in the Eurozone. Belgium posted a 5.2% deficit last year, versus France’s 5.1%. Across the developed world, governments spent the last 15 years running large deficits on the assumption that interest rates would stay near zero forever. Those days are over. As I explained recently, the Everything Bubble is now bursting in the bond markets of countries like France and Japan.
So where does the money go when investors flee these markets?
History gives us the answer. During the 2011 Eurozone crisis, capital fled European sovereign debt and poured into U.S. Treasuries. The flight was so large that the yield on the 10-year Treasury fell below 2% in the weeks after S&P stripped the U.S. of its AAA rating.
The U.S. has its own debt issues. But it has the world’s reserve currency, the deepest bond market on the planet, and a central bank that can buy its own government’s bonds. France has none of those. When the next leg of the European debt crisis hits, the U.S. is likely where that flight capital lands.
For investors, this is a major signal. When a country loses control of its bond market, the endgame tends to look the same: the central bank is eventually forced to step in and buy the debt, rules or no rules. The ECB did this once before in 2012, when Mario Draghi pledged to do “whatever it takes” to save the euro. Printing money to hold a currency union together is inflationary, and the assets that benefit are hard assets like gold, energy, and the companies that produce them.
On that note, we just published a special report titled Survive the Inflationary Storm. It outlines our top investments for profiting as governments turn to printing money to deal with their debt problems.
It normally sells for $499. I’m releasing 100 copies free to Gains, Pains & Capital readers today, and when they’re claimed the offer closes.
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Best Regards
Graham Summers
Chief Market Strategist
Phoenix Capital Research
