France’s Credit Warning: Borrowing Costs Surge as Political Gridlock Deepens

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Vanguard has issued a stark warning that France is becoming a “long-term degrading credit,” as the eurozone’s second-largest economy grapples with surging borrowing costs, record debt levels, and deepening political paralysis.

Borrowing Costs Hit 18-Year High

France’s 10-year bond yield has climbed to nearly 4.8%, an 18-year peak, while the gap between French and German borrowing costs has breached one percentage point for the first time since the 2012 debt crisis. Investors now demand more to lend to Paris than to Rome or Athens, and the cost of insuring French sovereign debt against default has reached its highest level in almost a decade.

Record Debt, Foreign Dependence

Public debt is projected to hit a record 119.3% of GDP this year and 121.7% in 2027, with the budget deficit running at 5.4%—nearly double the EU’s 3% limit. More than half of French government bonds are held by foreign investors, including Japanese pension funds and U.S. asset managers who can exit quickly if confidence falters.

Downgrades Pile Up

Rating agency Scope downgraded France to A+ from AA- on September 17, citing a sustained deterioration in the fiscal outlook, while Morningstar DBRS moved to a negative outlook the same day. Fitch Ratings affirmed France at A+ with a stable outlook in August, but market sentiment has continued to sour.

Political Gridlock Looms

Prime Minister Sébastien Lecornu is pursuing €54 billion in savings in the 2027 budget but faces a divided parliament and a confidence vote on November 17. The 2027 presidential election looms, with neither leading camp campaigning on the spending discipline that bond markets want.

Vanguard’s Warning

Ales Koutny, Vanguard’s head of international rates, told the Financial Times that France is a “long-term degrading credit,” cautioning that demand in debt markets can vanish once a country becomes the center of stress. He warned that France’s bond spread over Germany could widen to 1.5 percentage points if conditions worsen, drawing a comparison to Italy’s market turmoil after its 2018 election.

France’s central bank chief has already cautioned that the country cannot rely on the European Central Bank to solve its debt problems.