France Emerges as a 'Poster Child' for Sovereign Debt Problems as Government Borrowing Costs Approach 2008 Highs

France's public finances are in a state of decline, and political gridlock is increasingly worrying bond investors. The cost of borrowing for the government is nearing levels not seen since the 2008 financial crisis, with another challenging budget negotiation on the horizon.

As the European Union's second-largest economy, France has grappled with persistent political instability and growing fiscal pressures in recent years. The country has consistently breached European Commission regulations concerning budget deficits and debt limits. Moreover, successive prime ministers have been ousted after failing to implement reforms, spending cuts, or tax increases to address the fiscal situation.

France is currently under the EU's excessive deficit procedure. The Council has recommended that the country rectify its excessive deficit by 2029, but significant progress is still needed. EU treaties establish benchmark values of 3% of GDP for government deficits and 60% for government debt. Last year, France's deficit stood at 5.1% of GDP, while its debt-to-GDP ratio exceeded 115%.

The International Monetary Fund (IMF) projected in July that France's gross government debt would reach approximately 118.5% of GDP in 2026 and surpass 120% in 2027, remaining above this threshold through 2030.

Concurrently, the French economy is struggling to achieve growth. It contracted by 0.2% quarter-on-quarter in the first three months of this year and stagnated in the second quarter.

This period of turmoil has exerted considerable pressure on the country's bond markets. French government bond yields have risen sharply over the past year, a trend exacerbated by the global impact of the U.S.-Iran war on borrowing costs worldwide. This has resulted in France experiencing some of the highest government borrowing costs among G7 nations.

French 10-year government bond yields reached their highest point since 2008, exceeding 4.13%, last week and remained close to 4.1% on Friday. It's important to note that bond yields and prices move in opposite directions.

The French National Assembly is characterized by ideological divisions, leading to no-confidence votes, government collapses, and impasses concerning the national budget. France is expected to present its 2027 budget proposals to parliament by early October. Last year's budget resulted in a deadlock, compelling Prime Minister Sebastien Lecornu to push the bill through parliament after months of delays.

Lecornu became the fifth individual to hold the prime ministerial position in just two years upon his appointment in 2025. His resignation after only 27 days in office, citing political discord as an insurmountable obstacle to forging a functional government program, highlighted the prevailing instability. Lecornu was subsequently reappointed days after his resignation.

Another factor contributing to uncertainty in the French bond market is the upcoming 2027 presidential election. Far-right candidate Marine Le Pen is currently the frontrunner to succeed Emmanuel Macron.

'Poster Child' for Debt Problems

John Stopford, head of multi-asset income at Ninety One, commented to CNBC that escalating deficits and slowing growth have become a global challenge post-Covid-19 pandemic, wars, and energy crises, but France "stands out." He stated, "It's not just a French problem, but you could argue that in many ways France is one of the poster child [countries]. So I don't think it's unique to France [but] France's public finances have been going in the wrong direction."

He added that developed governments face a broader challenge in finding ways to balance their budgets and place debt on a more sustainable trajectory. Failure to do so, Stopford warned, is likely to trigger a "bond market revolt" at some point. He expressed understanding for investor concerns, noting, "It's not obvious how this ends in a good way."

The significant uncertainty clouding the OATs (French government bonds) market is the presidential election next year, according to Stopford. During a candidate debate, Le Pen emphasized that the government "must drastically cut its spending" and voiced "extreme concern" about Paris's debt trajectory.

However, Stopford indicated to CNBC that the market remains skeptical about Le Pen's commitment to placing public finances on a more sustainable footing. "Clearly we may get a change of regime or policy priorities post May next year, but people doubt that there's much appetite for material fiscal consolidation," he explained. "So yes, I think we might be building up to a crisis. I'm just not sure it's today."

Little Sign of Improvement

Théophile Legrand, a rates strategist at Natixis CIB, informed CNBC that his team already considers OATs to be "pre-stressed." He noted, "What could delay a recovery is not only domestic politics, but also the broader macro backdrop. The market is not expecting France to return to a 3% deficit as early as 2027, but it does look for signs that the 2027 budget is consistent with a credible medium-term path for stabilizing public debt. That path is becoming harder to deliver. The war-related backdrop and higher long-end rates already complicate the fiscal equation, while this summer's heatwaves and wildfires add another layer of uncertainty."

Legrand anticipates that the final months of this year and the first quarter of 2027 are the most likely period for renewed volatility in OATs, as the budget debate and presidential dynamics become more closely linked. He added, "That said, we do not expect a repeat of the 2024/2025 shock pattern. OAT valuations already look materially stressed: our fair value model suggests OATs are around 15 basis points cheap even before adding any political premium, and our year-end forecast is around 75 basis points on the 10-year OAT-Bund spread if the budget is passed, versus around 80 basis points if it is not and France moves to a special budget law."

April LaRusse, head of investment specialists at Insight Investment, observed that despite increasingly negative headlines regarding the French economy, there are "surprisingly little signs that France is preparing for the kind of fiscal adjustment that its debt dynamics would seem to require." She stated, "Growth expectations are being revised lower, debt is set to keep rising and bond yields are now at levels not seen since the financial crisis. Yet meaningful spending restraint remains politically difficult. With pension reform effectively on hold until after the 2027 election and parliament deeply fragmented, the government appears focused on maintaining political stability rather than tackling the underlying fiscal problem."

LaRusse concluded that the critical question for investors now is whether policymakers can find the political will to steer public finances onto a more sustainable path before market pressures intensify. "French government bonds already trade more cheaply than their Italian equivalents, which would have been unthinkable not that long ago — but they could get even cheaper in a negative scenario," she warned.

A tourist shelters from the sun under an umbrella during a heatwave in Paris on July 10, 2026.

Behrouz Mehri | Afp | Getty Images

Presidential hopeful Marine le Pen of the Rassemblement National party in Paris, France, on August 27, 2026.

Remon Haazen | Getty Images News | Getty Images