Investors increasingly doubt France will repay its debt, even though Italy and Greece are more deeply indebted and the US deficit is worse.
Thomas Philippon says rich countries have not borrowed this much for this long since World War Two, and he calls debt above 100% of GDP the new normal.
Thomas Philippon says the government ignored his 2024 council report urging it to stop adding debt and balance the budget over seven years, and France's ten-year yield jumped from about 3% to almost 5%.
Why bond markets now fear France more than Greece
France has become the test case for whether rich countries' long borrowing spree is ending. Its debt is lower than Italy's or Greece's, but its politics offer no credible plan to stop it growing. Markets price that trajectory more than the level, so rising rates could push France into a self-reinforcing loss of investor faith.
Takeaways
Markets judge debt by trajectory, not level. Greece, with debt at 136% of GDP and falling from over 200% a few years ago, is seen as less risky than France at about 120%. Philippon argues credibility about a country's future matters more than where its debt starts.
France's borrowing costs have jumped sharply. France's ten-year bond rate rose from about 3% to almost 5%, the highest it has paid since the 2000s. The spread spiked in late September as protests began. Investors who long gave France the benefit of the doubt now see it as especially risky.
Blanchard fears a national bank run. Higher rates make repayment harder, which worries investors and pushes rates higher still. Blanchard, who studies when debt turns catastrophic, suspects France is already in that danger zone. He shelved a Le Monde editorial fearing it could trigger the panic.
French politics is the root problem. A 2024 council of economists report, which Philippon helped write, urged France to stop adding debt and balance the budget over seven years. The government ignored it. The far left and far right offer no realistic plans, and protesters are demanding more spending.
Debt above 100% is the new normal. In the 1990s economists treated 60% of GDP as the ceiling. Today the UK sits at 102%, France 120%, the US 126% and Italy about 137%. Philippon says rich countries have not borrowed this much for this long since World War Two.
Zero rates fueled the spree, then ended. Blanchard's 2019 speech suggested near-zero rates meant debt could simply be rolled over. He now calls it a mistake, having not anticipated COVID, Ukraine, Iran or AI. He still argues there is no magic debt number if growth outpaces rates.
The US has cushions France lacks. Jeff Guo notes the US carries more debt and bigger deficits, but it controls its own currency, benefits from the dollar's international standing and grows faster. He says its most important asset is credibility, the belief it will eventually fix its finances.
What could happen next for France
Both economists say France must act, but Jeff Guo doubts its leaders will suddenly commit to balancing the budget given the political winds.
The European Central Bank has tools built after the financial crisis to stop countries spiraling into a debt doom loop.
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On this episode 7
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A European rescue fund could step in, though emergency money would likely come with strings and tighter budgets.
Philippon warns that cutting spending fast and poorly would cut more than needed and hurt vulnerable people.