The French Bond Market Is on Fire

Patrick Boyle · Patrick Boyle On Finance

France's debt path is unsustainable: its interest bill and primary deficit keep outrunning growth, and planned savings fall short.

France's borrowing costs are about two percentage points above nominal GDP growth, the widest gap in the rich world and wider since. France runs a primary deficit of 2.9% of GDP and has run one every year since 2002. A French government-commissioned report projected the deficit rising to 6.8% of GDP by 2030, debt passing 130% of GDP, and the interest bill growing about €10bn a year. Stabilising debt needs about €125bn a year in savings by 2032 at July's 3.7% borrowing rate. With the 10-year rate now near 4.9%, the savings need is already about €140bn a year. Prime Minister Lecourneau's €43bn 2027 package does not cover that and must be repeated every year without a parliamentary majority. The report describes a ratchet effect: emergency support for each crisis stays in place, and France's tax take is already 44% of GDP, the highest in the eurozone. Public consent to higher taxes is weakening, which leaves spending cuts, and pensions are politically radioactive. Boyle concludes that, unless something changes, French debt keeps growing faster than the economy.

“On those numbers, unless something changes, French debt keeps growing faster than the French economy.”at 8:25

Patrick Boyle · Patrick Boyle On Finance

Italy borrows more cheaply than France because it runs a primary surplus and has already proven fiscal adjustment.

Italy has more debt than France, yet the bond market rewards it with lower yields. Boyle's explanation is the primary balance, the budget before interest. Italy has run a primary surplus in most years since the early 1990s, after learning from the 1992 currency crisis and the euro crisis. Its overall deficit is expected to fall below 3% of GDP this year. France runs a primary deficit of 2.9% of GDP, has not balanced its overall budget since 1974, and has no history of adjustment. Italy's 2027 tax-cut and election risks, including spending on defence and energy, are real but secondary. The bond market has judged that Italy has already gone through its crisis and shown it can run a surplus, while France has not, and that adjustment is politically costly in France.

“Italy has already had its crisis and has shown that it can run a surplus. France hasn't,”at 19:28

Patrick Boyle · Patrick Boyle On Finance

The euro turns France's fiscal stress into a slow squeeze rather than a sudden currency run.

Boyle agrees with Bloomberg's Lionel Laurent that France's situation is a slow squeeze, not a sudden blow-up like Liz Truss's. Historically, when a country has its own currency, fiscal stress shows up first in the currency and arrives all at once. Boyle cites May 1968, when a general strike and a deal raising the minimum wage by about a third triggered capital flight and reserve losses, and the franc was devalued about 11% in 1969. Today, the euro shields France from that kind of currency run. Instead, the pressure arrives gradually through a spread over Germany that keeps widening, a rising interest bill that takes more of the budget each year, and a steady turnover of prime ministers.

“the euro protects France from a currency run, so the pressure arrives more slowly, a spread over Germany that keeps creeping wider”at 28:53

Patrick Boyle · Patrick Boyle On Finance

Hyperscaler borrowing for data centres competes for global savings and is helping push government bond yields higher.

Goldman Sachs expects the five biggest hyperscalers (Alphabet, Amazon, Meta, Microsoft and Oracle) to spend about $800bn on capex this year and $1.2tn next, more than 3% of US GDP. They used to fund data centres from cash flow, but they now borrow heavily. They have issued $230bn of bonds so far this year, double last year's total. That debt comes from the same global savings pool that governments borrow from. The AI companies are not very price-sensitive, since they see data centres as existential and treat an extra percentage point of interest as a detail. The Economist says hyperscalers account for nearly 10% of new euro-denominated bonds sold by non-financial companies. Boyle presents this as one of the main reasons global government yields are rising.

“That money comes out of the same global pool of savings that governments borrow from, and the AI companies are not very price sensitive borrowers.”at 5:25

Patrick Boyle · Patrick Boyle On Finance

The Iran war's oil shock is keeping inflation high and pushing central banks toward rate hikes, raising borrowing costs.

Boyle names the war in Iran as the second reason for the global bond selloff. Crude oil is about 40% more expensive than before the war began. That has kept inflation high and pushed central banks to raise rates instead of cutting them. The Federal Reserve raised rates in September for the first time since 2023, and the ECB has raised twice since June. Higher policy rates raise the borrowing costs of every indebted government, so each one faces a harder debt-sustainability test.

“Crude oil is about 40% more expensive than it was before the war started. This has kept inflation high and pushed central banks into raising rates rather than cutting them.”at 6:05

Patrick Boyle · Patrick Boyle On Finance

Japan's debt is shrinking in real terms because inflation has risen alongside interest rates, and most of it is domestically owned.

Japan's net debt is 134% of GDP and its gross debt is higher. Boyle argues that inflation has risen alongside interest rates, so in real terms the debt is shrinking. Most of it is owed to Japanese holders, which reduces the risk of a foreign-financed debt run. This is why Japan's rising 10-year yield, above 3% for the first time since 1996, has not turned into a fiscal crisis in the way France's has.

“inflation has risen alongside interest rates, so in real terms, the debt is shrinking and most of it is owed to the Japanese.”at 7:26

Patrick Boyle · Patrick Boyle On Finance

The ECB's Transmission Protection Instrument is unlikely to be used for France, since France is ineligible and Berlin would object.

The ECB will not let France collapse, but the TPI, created in 2022, is an emergency tool meant mainly for countries that don't need rescuing. Eligibility requires sound and sustainable fiscal policy, and France is under the EU excessive deficit procedure. Cramer says that doesn't automatically rule France out, but it doesn't help. Using the TPI on a government running a 5.4% deficit that may not be able to pass its budget would not go down well in Berlin. Lagarde's 2020 remark that the ECB was not there to close spreads, which pushed Italian yields up before she walked it back, shows the political sensitivity. The ECB's likely options are verbal reassurance, reinvesting maturing bonds tilted toward France, or easing rate hikes first.

“the ECB isn't going to let France collapse, but the TPI is an emergency rescue tool designed mainly for countries that don't need rescuing.”at 25:48