France's Debt Crisis Looms as Politicians Dither on Fiscal Reforms

France's public finances are rapidly deteriorating, yet politicians have avoided tax increases and spending cuts to avoid alienating voters ahead of next year's presidential election.

The country's reliance on foreign investors is a major concern, with foreign money holding 57.5% of French government bonds in the first quarter, up from 49.8% in 2022. This high level of dependence on outside capital makes France vulnerable to market stress.

Rising Japanese government bond yields and moves in the yen could ripple through the French market, particularly if Japan's Government Pension Investment Fund (GPIF) shifts its investments. GPIF holds approximately ¥5.8443 trillion (or roughly ₩50.5 trillion) in French bonds, making it a significant player.

Markets expect the European Central Bank to raise interest rates for a third time this year, which could further exacerbate France's debt burden and increase the risk of a bond market shock spreading to other heavily indebted euro zone countries.