France's Default Insurance Now Costsliest Among Major EU States

The cost of insuring against a French sovereign default has become the highest among the major EU countries and the UK, as bond investors start pricing in growing odds that the eurozone's second-largest economy could fail to pay its debts.

That is the verdict of Thierry Wizman, global FX and rates strategist at Macquarie Group, who wrote in a note Thursday that the market no longer sees France curbing its rapidly growing debt pile anytime soon — especially with the prospect of a far-right or far-left president after next year's election.

The alarm bells grew louder early Friday. France's five-year sovereign credit default swap climbed to 81 basis points. The country's 10-year bond yield jumped to 4.989%, its highest level since 2002. The premium over equivalent German yields widened to 152 basis points, the widest since the eurozone debt crisis in 2011.

Wizman warned that "the signal from France CDS pricing is that the OAT/Bund spread widening is due to higher sovereign default risk in France."

Those metrics later came off their highs. But the fundamentals remain troubling. France's GDP growth is anemic. Its budget deficit is estimated at about 5.4% of GDP. Debt-service costs are rising as yields climb. The debt-to-GDP ratio is expected to reach 122% next year, up from 119% this year, and the government's latest fiscal plan failed to halt the surge in yields because investors doubted its credibility.

"But our instinct is to also read the suddenly widening OAT/Bund yield spread as a 'guilty' verdict on the recent direction of France's presidential politics," Wizman wrote. "The problem in particular is political polarization, which has arisen—as it has across Europe—mainly over the immigration issue, rather than fiscal issues. But in France, neither the populist Left nor the populist Right are fiscal hawks."

The leading candidates illustrate the problem. Far-left presidential candidate Jean-Luc Mélenchon is campaigning on a plan to have the central bank simply cancel its holdings of French debt. Far-right leader Marine Le Pen, who leads the polls for the presidential race, has proposed tax cuts and vowed to lower France's retirement age to as low as 60 — despite an already-generous pension system consuming an ever-bigger slice of the budget.

A runoff between the two is expected next year, and Le Pen's National Rally (RN) party is seen as the likely winner.

"As such, an outright default may be a low-probability event, but an RN-led presidency, with an adverse influence on the 2028 budget and credit-risk perceptions is a high-probability event, near 50%," Wizman added.

He also noted that the presidential campaigns have barely begun, meaning rhetoric around France's debt, a potential default, and budgetary politics is set to heat up — and further damage the perception of the government's creditworthiness.

France is not alone in grappling with debt woes and a bond market revolt. The U.S. debt-to-GDP ratio now stands at 100%, and Japan's is well above 200%. But America's GDP growth is far more robust, and Japan enjoys a large pool of built-in demand for its debt from domestic investors.

France has no such cushion. Its economy is projected to grow just 0.5% this year, and the government plans to issue over $380 billion in medium- and long-term debt next year.

Ales Koutny, head of international rates at Vanguard, told the Financial Times that demand for debt in markets that become the center of geopolitical issues "can disappear in times of crisis," describing France as a "long-term degrading credit."

Scope Ratings flagged the same political risks when it cut France's credit score to A+ from AA- last month, bringing its rating on par with Fitch and S&P Global Ratings. The ratings firm cited the government's difficulties in meeting self-imposed deficit targets and warned that the sharp rise in bond yields this year will push borrowing costs higher and make any debt solution more painful.

"Scope expects political fragmentation to remain elevated beyond the 2027 presidential election, complicating the substantial fiscal consolidation required to stabilize public debt and increasing the risk that measures are diluted, delayed or only partially implemented over coming years," the firm said. "This weakens Scope's confidence in France's ability to halt, let alone reverse the deterioration of its public finances over the medium term."

With the presidential campaign still in its early stages and both leading contenders promising to loosen fiscal policy rather than tighten it, the spread between French and German bonds — and the price of default insurance — is likely to stay under pressure well into next year.