French 10-year bond tops 5% for the first time since 2002

France now pays 5% on its debt: the market has doubts

How high does a country's borrowing cost have to rise before investors stop looking at GDP and start looking at the streets? The French 10-year bond broke through the symbolic 5% threshold this Wednesday, something not seen since 2002. The risk premium shot up to 156 points, its highest level in fifteen years, and the spread over the German bond — the eurozone's safest borrower, at around 3.41% — widened without pretense. The immediate cause: the riots of October 17 and 18, with looting in several cities, which added a direct cost to GDP to the fiscal equation and, above all, an uncomfortable question about the state's ability to balance its books.

From 4% to 5% in three months

At the start of summer, the French bond was hovering around 4%, a level already billed as a record since 2008. Three months later, 5% has stopped being a psychological barrier and become reality. The CAC 40, however, recovered 0.5% this Wednesday after a string of losses, because the equity market and the debt market don't always look at the same things.

Prime Minister Sébastien Lecornu has presented a draft budget for 2027 with the aim of cutting the deficit from the current 5.4% to 5%. On paper it sounds reasonable. In practice, parliament is polarized and the presidential elections are six months away. ING analysts sum it up bluntly: "The riots are adding to concerns about France's ability to consolidate its finances." They add that the unrest "also adds a significant direct cost to GDP."

Who pays the 5% and who collects it

There's a detail that often gets lost among the headlines: when a bond's yield rises, whoever bought that bond earlier loses money if they want to sell. Anyone who bought French debt a year ago, when it yielded less, has to offer a higher interest rate to sell it on the secondary market. Banks, the main holders of "cheap" bonds, are the first to feel it on their balance sheets. European banking wakes up to that burden.

The 5% punishment can be read in many ways. Some argue it's a healthy correction for a country that has spent decades creating debt and inflation with a fiscal irresponsibility that is now taking its toll. Others point out that 5% is still a real interest rate close to zero if underlying inflation stays high: the punishment, in real terms, isn't one. The debate over whether the market disciplines or simply trinc the ECB remains open.

The political picture doesn't help

Polls point to a showdown in the upcoming presidential election between Marine Le Pen, leader of the National Rally, and Jean-Luc Mélenchon, candidate of La France Insoumise. Neither scenario reassures investors. Mélenchon has even floated writing off the portion of French debt held by the European Central Bank, an idea flatly rejected by Christine Lagarde and branded "absolute nonsense" by the government. Le Pen, for her part, proposes leaving the euro, which would end the ECB's backing — the institution that, according to analysts, is propping up the rising cost of debt on the conviction that it would intervene if things spiraled out of control.

Moody's is scheduled to review France's credit rating. It currently assigns AA3 with a negative outlook, opening the door to a downgrade that would deal a fresh blow to the already weakened French debt. The timing is no coincidence: the review comes in the wake of the riots and with the budget still up in the air.

The problem nobody wants to name: eurobonds

European solidarity has an arithmetic limit. The more fiscally responsible countries — the Netherlands, Germany — pay less for their debt and don't want to enter into eurobonds because it would force them to pay more for shared debt than for their own. Their populations are already angry at seeing that countries with more fiscal irresponsibility have a higher rate of home ownership while they watch their public pensions shrink and face rising rents when they retire. The German residential model, built on renting, creaks when retirement arrives with a €1,400 pension and €1,000 rent. Hence the minijobs for retirees.

The question hanging over the market is not whether France will pay, but at what price. And that price, in the form of inflation or higher rates, always ends up in the saver's pocket. The story of the 5% doesn't end in France.

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This article is based on information published by France24 and Cinco Días on the evolution of the French bond and on data provided by analysts at ING and Toronto Dominion Bank.