Pandemic debt legacy weighs on France’s fiscal crisis
France faces a deepening fiscal crisis as pandemic-era bonds mature, with 10-year yields at 4.84 per cent. The debt agency plans a record €340 billion borrowing in 2027, while political constraints and welfare protests hinder reform. Analysts warn of contagion risks to global bond markets.
France’s 10-year government bond yield has eased slightly since 1 October but remains elevated at 4.84 per cent, up from 3.53 per cent in June – an increase of more than 1.3 percentage points in four months that has alarmed investors, according to veteran independent commentator Andrew Wong.
The country faces multiple challenges including its fiscal deficit, public reliance on social welfare, immigration policy and an approaching general election. The current government faces political constraints that make it difficult to implement revenue-raising or spending-cut measures to address the fiscal problems. These factors have driven a sustained decline in French bond prices in recent months.
However, Wong writes, one often-overlooked factor is the unresolved fiscal legacy of the Covid-19 pandemic, which remains a major contributor to France’s current fiscal crisis. France’s debt management agency, Agence France Tresor, recently indicated it plans to borrow a record 340 billion euros (HK$2.99 trillion) in 2027 – approximately 28 billion euros more than this year.
A key reason is that a substantial volume of bonds issued during the pandemic will mature next year, sharply increasing the government’s debt repayment and refinancing requirements. With French bond yields at their highest since 2008, a further increase in borrowing next year could place even greater strain on the country’s public finances.
The pandemic forced France to substantially increase borrowing to finance subsidies, welfare payments and other support measures. Four years later, the country has evidently failed to generate sufficient economic growth and revenue to put its public finances on a more sustainable footing. Continued dependence on welfare spending has made it difficult to reduce the fiscal burden.
Public opposition to potential welfare cuts as part of the government’s efforts to address the fiscal deficit has contributed to large-scale protests and civil unrest in recent days. Wong notes France is not alone in failing to address pandemic-era debt: with US Treasury yields remaining elevated and France’s difficulties coming to the fore, contagion across global bond markets could trigger further selloffs in European and emerging-market sovereign debt, introducing greater uncertainty into global financial markets for the remainder of the year.