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For the first time since 2007, French government bonds have higher yields than their Spanish equivalents. Why is it that French debt is falling out of favor with investors? 

France has higher debt levels than almost anyone else in Europe and is accumulating new debt more quickly than most of its peers.

Rising Debt

Government debt in France comes to 106% of gross domestic product (GDP) – about the same as Belgium and Spain and less than Greece or Italy. However, when one includes private sector debt, the French debt burden is tied for first place in the Eurozone. 

Moreover, French debt has been on the rise in recent years whereas debt burdens elsewhere have been falling relative to national output. In Spain, for example, total debt-to-GDP has fallen from 311% to 232% over the course of the past ten years. In France, it has increased from 287% to 315% over the same period.

Part of the reason is that France is running large budget deficits equivalent to 5.5% of GDP – the second highest among the Eurozone countries. This means that France is accumulating new public debt faster than most of its peers. Additionally, since no political party is close to having a majority in the National Assembly, it is difficult for France to implement policies that would change the country’s fiscal trajectory.

Government Bond Yields

In the meantime, further widening of spreads between French OATs and Germany Bunds is a possibility. This risks creating a debt spiral for France where increased financing costs lower economic activity, which in turn causes the debt ratios to rise further. 

However, there is good news for France: the European Central Bank’s rate cuts will lower the cost of financing across the entire Euro area, including in the French Republic.


 

 

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