France’s Appetite For ‘Magic Money’ Has Turned Into A Debt Bomb

France is on the precipice of a dangerous financial spiral.
The global surge in interest rates has exposed the country, once considered an oasis of relative stability in Europe’s financial markets, as one of the continent’s weakest links. France now pays more to borrow than former crisis hot spots like Greece and Italy. Its government is running a budget deficit surpassed only by the United States among its peers.
Last week, a slow-burning selloff in France’s government bond market took an alarming turn as it spread across the continent, reviving memories of the eurozone debt crisis last decade. France’s 10-year borrowing cost has risen toward 5%, the highest level since 2002. Investors are bracing for things to get worse. The rise in rates is saddling the government with higher costs just as it needs to refinance a mountain of debt borrowed during the era of ultralow interest rates. France has more than $1 trillion in debt coming due by 2030, and next year is set to sell a record of about $380 billion in debt into a market where once-reliable sources of demand have evaporated.
France’s central bank is no longer buying government bonds and is instead letting its portfolio shrink as bonds mature. Once-steady investors like Japanese asset managers have also stepped back. Hedge funds that have stepped into the void have been burned by the recent volatility.
“France has been this free rider in Europe for years, if not decades. It has gotten away with fiscal murder,” said Kevin Thozet, a portfolio adviser at the French asset manager Carmignac. “It worked as long as people were not noticing. Now people have started to notice.”
The cost of servicing France’s debt is expected to climb 59% by 2030, according to a recent study commissioned by the French finance ministry. Debt payments are now one of the French government’s largest line items and could dwarf military spending by the end of the decade. France’s debt, now worth nearly 120% of gross domestic product, risks putting the economy in what its central-bank chief recently called a “gradual stranglehold.”