Yields on 10-year French government bonds rose to 5% on Wednesday, their highest level since 2002, as pressure mounted on the French government over the public debt crisis, protests over the rising cost of living, and spending on public services.
French bond yields rose by more than 20 basis points over the course of a week, compared with an average increase of about 5.7 basis points across major economies, according to London Stock Exchange data. The yield spread between French and German bonds reached 150 basis points, while German yields stood at around 3.4%, as investors demanded higher returns amid uncertainty over France’s plans to reduce its debt.
The government of Prime Minister Sébastien Lecornu is under pressure to cut the 2027 budget deficit by around €54 billion. French public debt stood at €3.59 trillion at the end of June, equivalent to roughly 120% of gross domestic product.
Bloomberg warned that France needs to cut spending by at least €125 billion by 2032 to prevent further deterioration in its debt position, as the cost of servicing the debt continues to rise.
France has witnessed protests over the rising cost of living and demands for increased spending on education and social services. Recent unrest has resulted in losses estimated at hundreds of millions of euros.
High energy prices are adding to pressure on public finances, with Brent crude reaching around $110 a barrel. This is increasing the cost of public services and fueling inflation, while putting pressure on the European Central Bank to raise interest rates, which could further increase France’s debt-servicing costs.
Raising the retirement age from 62 to 65 is among the options being considered to reduce spending. The measure could save between €17 billion and €19 billion annually by 2030 and around €32 billion a year by 2035.
President Emmanuel Macron’s 2023 attempt to raise the retirement age to 64 triggered widespread protests, while the cost of the pension system continues to rise as the population ages.
The financial pressures come amid political divisions ahead of next year’s presidential election. Although Marine Le Pen has pledged fiscal discipline, her program includes tax cuts and increased spending, according to Bloomberg.
Amid the debate over public debt, Jean-Luc Mélenchon proposed canceling more than €500 billion of French public debt held by the European Central Bank. ECB President Christine Lagarde rejected the proposal, saying the rules do not allow member states’ debts to be canceled. Article 123 of the Treaty on the Functioning of the European Union prohibits the ECB and national central banks from financing member governments.
The French government faces the challenge of cutting spending and controlling public debt at a time when austerity measures and pension reform are fueling political divisions and public protests.
