Jonathan Gane

Many don’t yet grasp the seriousness of the French crisis. Markets have priced French debt as junk. The 10-year spread over German bunds has blown out to 174 bp, wider than Italy, Greece or Portugal, despite France’s AA-range S&P rating. The market concludes France’s fiscal arithmetic is broken and politically unfixable. Public spending remains among the highest in the developed world (57% of GDP), an absurd tax burden already crushes growth potential, and the political system is paralyzed. Meaningful reforms have been impossible for years. When governments try, the unions and street response is rapid and often violent. Recent riots made the constraint explicit, any serious attempt to cut spending or raise the retirement age risks further unrest that damages business confidence, tourism and tax revenues. The short-term fiscal hit is already visible, the longer-term confidence channel is worse. Higher borrowing costs compound the problem. Interest spending is set to exceed €90 billion next year, more than the defence or education budgets, and will keep rising as debt is refinanced at these spreads. That interest bill more than offsets any modest consolidation that might be legislated, widening the deficit and accelerating the debt-to-GDP ratio already near 120%. A ratings downgrade, which markets clearly anticipate, would raise funding costs for French banks, tightening credit, slowing growth and eroding tax revenues even further. That is the classic doom loop: higher yields → larger deficit → weaker growth and banks → even higher yields. Rating agencies lag markets but will eventually follow the pricing. France lacks a governing majority capable of sustained fiscal adjustment without triggering further social paralysis and unrest. Until that changes, the market correctly treats French sovereign debt as much higher risk than its official rating implies. It is really difficult to imagine a scenario where France gets its act together and avoids a debt crisis taking down the entire eurozone with it. Please correct me if I’m wrong.