FX.co ★ Debt crisis in France alarms whole world

The mass sell‑off of French government bonds has become a worrying signal for governments around the globe. Capital Economics analysts note that investors are no longer willing to tolerate chronic budget deficits. Global policymakers will now have to cut spending urgently to avoid Paris’ fate.

France’s problem is not the appalling scale of its debt — projected at 118% of GDP in 2026. That ratio is comparable to the UK and even below that of the US or Japan. The main issue is the country’s excessive appetite. While Italy expects a primary surplus of 1% and the UK keeps its deficit around 1.4%, France’s figure is swollen to 2.8%. No other major economy has such a huge gap between current spending and the level needed to stabilize debt.

Budget rescue is hampered by politics. Emmanuel Macron’s government lacks a parliamentary majority, and any attempt to cut spending immediately brings French citizens into the streets. Investors openly fear a rise in populism, especially given Marine Le Pen’s position as the frontrunner in next year’s presidential race. Therefore, experts doubt crucial reforms and forecast that the overall deficit will remain at a disastrous 5.4%.

The world will have to pay for Paris’ problems. Foreign investors own 60% of France’s marketable public debt — a staggering €1.6 trillion. A sharp fall in those bond prices would hit the capital of global banks and funds. The only consolation is that a systemic global crisis will hardly break out because toxic French debt is spread relatively evenly across international portfolios.