French bond yields near 2008 highs as debt and budget risks mount

France’s deteriorating public finances and political deadlock are becoming a growing concern for bond investors, with borrowing costs near financial-crisis-era highs as another difficult budget battle looms.

The European Union’s second-largest economy has endured recurring political instability and mounting fiscal strain in recent years. It has repeatedly broken European Commission rules on budget deficits and debt limits, and successive prime ministers have been ousted after failed attempts at reform, spending cuts and tax rises to bring the situation under control.

France is subject to the EU’s excessive deficit procedure, with the Council recommending that it end its excessive deficit by 2029 — but it has a long way to go.

EU treaties set reference values of 3% of GDP for government deficits and 60% for government debt. Last year, France’s deficit reached 5.1% of GDP, while the debt-to-GDP ratio surpassed 115%.

The IMF projected in July that France’s gross government debt would reach about 118.5% of GDP in 2026 and exceed 120% in 2027, remaining above that level through 2030.

At the same time, the economy is struggling to grow, contracting 0.2% quarter-on-quarter in the first three months of this year and stagnating in the second quarter.

The upheaval has caused acute stress in the country’s bond markets, with French government bond yields rising dramatically over the past year — exacerbated by the U.S.-Iran war’s impact on borrowing costs worldwide — giving France some of the highest government borrowing costs in the G7.

French 10-year government bond yields hit their highest level since 2008, above 4.13%, last week and remained near 4.1% on Friday. Bond yields and prices move in opposite directions.

The French National Assembly is ideologically fractured, leading to no-confidence votes, government collapse and deadlocks over the national budget.  

France is expected to submit its 2027 budget plans to parliament by early October. Last year’s budget led to a deadlock that saw Prime Minister Sebastien Lecornu force the bill through parliament after months of delays.

Lecornu became the fifth person to hold the role in just two years when he was appointed in 2025. His resignation just 27 days into the job, saying political discord had made it too difficult to build a workable government program. Lecornu was reappointed days after quitting.

Another source of uncertainty that’s weighed on French bonds is the 2027 presidential election, where 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, told CNBC that swelling deficits and slowing growth have become a global problem in the wake of the Covid-19 pandemic, wars and…