How can you govern a country that has two hundred and forty-six varieties of cheese? - Charles de Gaulle
How can you govern a country that has two hundred and forty-six varieties of cheese?
Governments have traditionally borrowed at lower yields than domestic corporations, particularly banks. In France, that relationship has reversed. The yield on French 10-year government bonds has climbed to 4.83%, exceeding the 4.63% yield on comparable-maturity investment grade senior bank debt. The resulting 20-basis-point (bp) inversion is unprecedented in the chart’s history dating to 2009. At times during that period, French banks paid more than 200 bps above the French government to borrow.
Banks and national governments are closely connected. Banks hold government debt, while governments have historically provided financial support to their banking systems during crises. In the mid-1990s, France rescued lender Credit Lyonnais at an estimated cost of 15 billion euros. During the European sovereign debt crisis in the early 2010s, weakness in banks and governments reinforced one another, creating the so-called sovereign-bank doom loop.
France’s fiscal problems have been accumulating for decades. The government has not balanced its budget since 1974, public debt is approaching 120% of gross domestic product (GDP), and the deficit remains above 5% of GDP. France also has one of the G-20’s highest tax burdens. In 2023, taxes and compulsory social contributions amounted to approximately 44% of GDP, compared with 42% in Italy, 37% in Germany and 26% in the United States, yet France continues to run substantial deficits. Further tax increases offer a politically difficult solution, while reductions in public spending face equally formidable opposition.
This fiscal predicament has increasingly become a political one. France’s minority government is facing bond investors demanding fiscal discipline, while voters, labor unions and protesters are resisting cuts to public services and benefits. Caught between the bond market and the barricades, fiscal consolidation remains elusive. The April 2027 presidential election adds uncertainty over France’s fiscal direction, heightened by Marine Le Pen’s entry into the race in July and her subsequent lead in several first-round polls. Her proposals to reverse pension reform and increase spending raise further questions about France’s ability to achieve fiscal consolidation.
The French bond sell-off comes amid a global rise in sovereign yields, driven partly by the Iran war, higher energy prices and growing competition for capital. French bonds have nevertheless underperformed many European peers. France’s 10-year borrowing premium over German Bunds recently exceeded 140 bps, surpassing Italy's comparable spread. In addition, French government yields have moved above those of Greece and are approaching the 10-year U.S. Treasury yield of approximately 5.2%. In Blog 53, From Grexit to Gravitas, the convergence of Greek and French government bond yields reflected their diverging fiscal trajectories.
Higher borrowing costs are now compounding France’s fiscal difficulties. Government interest expenditure reached approximately 66 billion euros in 2025 and is projected to nearly double to 124 billion euros by 2030. Over half of France’s outstanding government bonds, totaling more than 1.4 trillion euros, will mature by 2032 and could be refinanced at considerably higher rates. With difficult fiscal decisions still unresolved, France now borrows at higher yields than its own banks.
Between the Lines is a weekly blog by DoubleLine Portfolio Managers Sam Garza, Joseph Mezyk and Quant Analysts Fei He, CFA and Sunyu Wang that breaks down topical macro and market issues. For questions or suggestions please e-mail us at betweenthelines@doubleline.com. The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of DoubleLine Capital LP, its affiliates or employees.
