France's Borrowing Costs Cross 5% for the First Time Since 2002
French 10-year bond yields topped the symbolic mark as investors lost patience with France’s budget crisis — days before Moody’s reviews the country’s credit rating.
France has crossed a line it has not crossed in nearly a quarter century.
The yield on the benchmark 10-year French government bond, known as the OAT, rose above 5% during trading on Wednesday. It had not been that high since July 10, 2002. By early Thursday it had climbed to 5.06%, according to market data reported by Dow Jones Newswires.
The figure measures what investors charge France to lend it money. The higher the yield, the more the state pays to fund itself.
The barometer traders watch most closely is the spread between French and German bonds. That gap hit 157 basis points on Wednesday and about 164 early Thursday. Since the euro was created, it has only been that wide once before, briefly in 2011 at the height of the euro crisis. To find anything like it otherwise, you have to go back to 1990, before the single currency existed, Le Monde reported.
The speed of the move is what stands out. The spread hovered near 50 basis points in May 2024. It rose to 80 after President Emmanuel Macron dissolved the National Assembly that June, then stagnated there for two years. Last month it took off: 100 on September 21, 120 on September 30, 140 on October 2. Now nearly 160.
A budget hole and a political deadlock
Two problems have arrived at once.
France’s public debt reached €3.6 trillion at the end of June, or 119% of GDP, according to the national statistics institute INSEE — a record not seen since 1946, when the country was recovering from the war. The budget deficit is among the widest in the eurozone. And Prime Minister Sébastien Lecornu is trying to push a 2027 budget with about €43 billion in spending cuts through a National Assembly where no bloc holds a majority.
Last weekend made the job harder. Cost-of-living protests on October 17 turned violent in Paris and other cities. Police made more than 1,200 arrests and a town hall in Limoges was set ablaze. Macron pledged on Wednesday to prevent a repeat of the violence, with more demonstrations planned in the coming days, according to Reuters.
France needs to sell a record amount of debt in the coming year to fund the deficit and refinance old borrowing. Each tick higher in the yield makes that more expensive. Markets now demand a higher return to lend to France than to Italy or Greece, a reversal that would have been hard to picture a decade ago. The strain has spread across the eurozone, pushing spreads wider in Italy, Belgium, Spain and Greece.
Moody’s decides Friday
Moody’s reviews France’s sovereign credit rating on October 23. The agency rates France Aa3 with a negative outlook, which means a downgrade is considered more likely than an upgrade, according to Reuters. A cut would raise France’s borrowing costs further.
Economists say the damage is already showing. France’s Institute of Economics forecasts 0.5% growth in 2027 if long-term rates average 4.5%. “If rates were to remain consistently above 5%, that prediction would have to be revised downward,” Mathieu Plane, the institute’s deputy director of analysis, told Le Monde. The government’s own budget assumes 1% growth, with domestic demand doing the work.
Charlotte de Montpellier, an economist at ING, warned that the loss of confidence is now the greatest economic risk: households may spend less, tourists may stay away, and companies may put off investment. Business investment accounts for 12.2% of GDP and household investment for 4.5%, she noted.
