France’s borrowing costs have surged amid the worst social unrest in the country in decades. Yields on French bonds have risen to their highest levels in nearly a quarter of a century as investors demand higher returns for taking on government debt. The surge reflects a growing conviction in bond markets that lending to France is becoming an increasingly risky proposition.
While France is grappling with a widening gap between government spending and revenues, the country’s fragmented political landscape is bitterly divided on how to plug the hole. Meanwhile, hundreds of thousands of protesters, some of whom have participated in rioting and looting, have taken to the streets to oppose proposed budget cuts and demand greater spending on cost-of-living relief and public services such as education. France’s national debt is now at its highest level since the immediate aftermath of World War II, nearing 120 percent of gross domestic product (GDP).
Bonds are a type of loan to a government or corporation. Countries routinely borrow from bond markets to allow spending that is not covered by tax revenues. In exchange for buying a bond, an investor is paid regular interest payments, plus the original borrowed sum at a set date in the future.
These bonds can be traded on the bond market to other investors in the meantime. Bond prices are influenced by interest rates, inflation and confidence in the issuer’s ability to repay the loan, among other factors. When bond prices rise, bond yields fall, and vice versa.
France’s 10-year bond yield has risen more than 130 basis points since June, topping 4.9 percent. France’s borrowing costs now stand at their highest levels since 2002, swallowing up a growing share of tax revenues that could otherwise be directed towards essential services such as education and healthcare. While France’s debt levels are relatively high, the amount that a country owes is just one consideration for investors pricing the risk of its bonds.
Market confidence in a country’s ability to meet its obligations is shaped by a range of factors, including the economy’s strength, the amount of its external debt versus domestic debt and the ability of the political system to govern effectively. In the fragmented National Assembly, French Prime Minister Ssbastien Lecornu, who was appointed by President Emmanuel Macron under the country’s semi-presidential system, is mired in a legislative battle to pass a budget for next year that includes 54 billion euros ($61bn) in savings. Marine Le Pen of far-right National Rally and Jean-Luc Melenchon of far-left France Unbowed, the two leading candidates in next year’s presidential election, are opposed to Lecornu’s proposals, though the government could invoke a constitutional clause to bypass parliament if deemed necessary.
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