France Debt Crisis Sparks Fears of Eurozone Contagion
France, once considered a safe borrower in Europe, is now facing a growing debt crisis as investors demand higher yields to finance its mounting debt. The country's 10-year borrowing costs surged to 5% last week, the highest level since July 2002. The premium investors demand to hold French government bonds over German debt has also climbed to its highest level since the eurozone debt crisis of 2011-2012, widening from 0.55 percentage points in mid-September to 1.45 points by Monday morning.
The selloff in French bonds has started to spread to other markets, with the euro falling to a 17-month low against the dollar. Borrowing costs in other heavily indebted European economies, including Italy, Belgium, and Greece, have also risen. At the heart of the problem is France's deteriorating fiscal position, with a budget deficit expected to reach 5.4% of GDP this year, far above the EU's 3% limit. Public debt reached €3.6 trillion in the second quarter of 2026, equivalent to 119% of GDP.
The French government presented its draft 2027 budget last Thursday, seeking to reassure markets with plans for €54 billion in spending reductions and additional revenue. However, investors remain unconvinced, citing political uncertainties and the difficulty of implementing fiscal austerity measures ahead of elections. Erik Bregar, director of FX and precious metals risk management at Silver Gold Bull, noted that the market is rejecting the 2027 budget due to upcoming elections. Stéphane Colliac, an economist at BNP Paribas, highlighted that France had already missed its budget targets in three of the four years between 2023 and 2026.
The European Central Bank (ECB) faces a policy dilemma as it balances concerns over inflation against the risk of rising sovereign yields destabilizing financial markets. Experts suggest the ECB may intervene to cap yields, but such a move could weaken its credibility. The deteriorating bond market has intensified concerns about debt sustainability and the potential for contagion to other high-debt European economies.