HONG KONG ECONOMIC TIMES (July 20) — Ongoing social unrest in France has exacerbated its fiscal crisis, pushing the 10-year government bond yield to historically surpass Italy's, long regarded as a weak link in the eurozone's fiscal structure. This reflects investors' perception that French government debt has become riskier than Italy's, sparking significant market concern.
By the end of June, France's public debt surged to a record high of 119% of gross domestic product (GDP). The fiscal deficit for this year is expected to reach approximately 5.4% of GDP, far exceeding the EU's 3% ceiling. Next year's debt interest payments are projected to rise to 72.9 billion euros.
Mike Bell, Head of Market Strategy at RBC BlueBay Asset Management, believes France is now caught in a dilemma: 'without fiscal consolidation, the bond market revolts; but with fiscal consolidation, the public revolts.' As the debt burden grows, market anxiety is spreading to other highly indebted eurozone countries.
Attention has now turned to whether the European Central Bank (ECB) will intervene. Goldman Sachs strategists believe there is currently no sign of the ECB's willingness to act, but if French government bond spreads disrupt market liquidity, authorities might deploy the Transmission Protection Instrument (TPI), designed to address disorderly widening of bond spreads among member states.
However, this firewall comes with strict eligibility criteria, requiring member states to comply with EU fiscal rules. Since France has been under an excessive deficit procedure since 2024, it risks losing eligibility if it is deemed not to have taken effective corrective actions. ECB President Lagarde has previously stated clearly that the primary solution to France's problems lies domestically, with the key resting entirely on fiscal policy. (rc)
By the end of June, France's public debt surged to a record high of 119% of gross domestic product (GDP). The fiscal deficit for this year is expected to reach approximately 5.4% of GDP, far exceeding the EU's 3% ceiling. Next year's debt interest payments are projected to rise to 72.9 billion euros.
Mike Bell, Head of Market Strategy at RBC BlueBay Asset Management, believes France is now caught in a dilemma: 'without fiscal consolidation, the bond market revolts; but with fiscal consolidation, the public revolts.' As the debt burden grows, market anxiety is spreading to other highly indebted eurozone countries.
Attention has now turned to whether the European Central Bank (ECB) will intervene. Goldman Sachs strategists believe there is currently no sign of the ECB's willingness to act, but if French government bond spreads disrupt market liquidity, authorities might deploy the Transmission Protection Instrument (TPI), designed to address disorderly widening of bond spreads among member states.
However, this firewall comes with strict eligibility criteria, requiring member states to comply with EU fiscal rules. Since France has been under an excessive deficit procedure since 2024, it risks losing eligibility if it is deemed not to have taken effective corrective actions. ECB President Lagarde has previously stated clearly that the primary solution to France's problems lies domestically, with the key resting entirely on fiscal policy. (rc)
