by Mish Shedlock, Mish Talk:
A fiscal and political crisis is brewing in France over mandated debt brakes. Marine le Pen threatens to collapse the government.
Greek Bond Milestone
EuroNews reports Greek Bonds Mark Historical Milestone Against France.
During the darkest days of the eurozone sovereign debt crisis, Greek 10-year bonds yielded nearly 40 percentage points, or about 4,000 basis points, more than France’s government bond, as the hellenic country teetered on the brink of default, weighed down by a debt burden exceeding 175% of the gross domestic product, severe austerity measures, and the spectre of a “Grexit.
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Fast forward twelve years, Greece has rewritten its economic narrative, with its government bonds narrowing the gap to France’s, marking a remarkable turnaround for the former poster child of the Eurozone’s debt crisis.
As of late November, Greece’s 10-year sovereign bonds yielded below 3%, aligning with the yield on France’s OAT bonds. In effect, investors now receive identical compensation for lending to Greece as they do to France.
Prime Minister Michel Barnier’s government is grappling with public backlash over a contentious €60bn spending-cut proposal, which Marine Le Pen’s National Rally opposes.
With parliamentary elections potentially looming next July, political stalemates risk paralysing fiscal reforms.
Goldman Sachs analyst Alexandre Stott noted the difficulty of reducing France’s budget deficit from 6.1% of GDP to the government’s 5% target, describing it as “a tall order.” Stott added, “We expect the debt-to-GDP ratio to rise to 118% by 2027, given the scale of the proposed consolidation and the reliance on tax increases.”
Political fragility further complicates France’s fiscal consolidation efforts. “The lack of political capital and limited fiscal headroom will likely constrain France’s ability to tackle structural reforms in the near term,” Stott warned.
According to Eurostat’s latest Autumn Economic Forecast, Greece’s economy is projected to grow by 2.3% in 2025, up from 2.1% in 2024, reinforcing its position as one of the eurozone’s most dynamic performers. By contrast, France’s economic growth is expected to slow to a modest 0.8% in 2025, down from 1.1% in 2024, highlighting the challenges facing Europe’s second-largest economy.
This divergence also extends to fiscal trajectories. Greece’s public debt-to-GDP ratio is forecast to decline significantly, from 153.1% in 2024 to 146.8% in 2025 and 142.7% in 2026, reflecting ongoing fiscal consolidation.
Meanwhile, France’s public debt is set to rise steadily, increasing from 112.7% in 2024 to 115.3% in 2025 and reaching 117.1% by 2026.
No Confidence
Reuters comments on French Borrowing Costs
Far-right and leftist opposition parties have been threatening to bring down Barnier’s government over its budget that includes 60 billion euros ($63 billion) in tax hikes and spending cuts.
Bond investors worry that the collapse of the government would mean any effort to cut borrowing is jettisoned.
French debt is historically elevated at 112% of GDP and rising. The state has spent heavily in response to the shocks of COVID-19 and the Ukraine war, while tax receipts have lagged expectations.
“Even if the government did achieve its planned consolidation, France would still have a pretty elevated budget deficit,” said Max Kitson, rates strategist at Barclays.
“If you look at Greece’s debt-to-GDP profile, you have a downwards trajectory which contrasts with France’s upwards trajectory.”
