French borrowing costs hit their highest level since 2002, and the gap with Germany is the widest since 2011. What is driving France's debt crisis and how far could it go?
For most of the past decade, lending money to France was considered almost as safe as lending money to Germany.
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That belief is now breaking down, and it is happening fast.
Last week, investors demanded up to 5% a year to lend to the French government for 10 years. France had not faced borrowing costs that high on its 10-year bonds since July 2002.
The extra return investors want to hold French debt instead of German debt rose to its highest level since the eurozone debt crisis of 2011-2012.
France now pays more to borrow than Italy and Greece, two countries that sat at the centre of that crisis.
This matters well beyond the bond market. Government borrowing costs influence the rates on mortgages and business loans and the interest bill that every French taxpayer ends up covering.
So how did the eurozone's second-largest economy get here, and how far could it go?
France's government debt has skyrocketed to 119% of GDP
The root of the problem is simple.
Every year, the French state spends far more than it collects in taxes, and it borrows to cover the difference.
This year, the gap, the deficit, is expected to reach 5.4% of the country's annual economic output, its gross domestic product (GDP).
EU rules set a deficit limit of 3% of GDP.
Year after year, those deficits pile up as debt.
French public debt reached €3.6 trillion in the second quarter of 2026. That equals 119% of GDP, up from 115.6% a year earlier, according to INSEE, the national statistics office.
The trouble starts when investors begin to doubt the repayment plan.
Why markets are losing patience with Paris
France has a plan. The problem is its track record.
Last Thursday, the minority government of Prime Minister Sébastien Lecornu presented its 2027 draft budget, which proposes about €54 billion in spending savings and additional revenue.
It targets a deficit of 5% of GDP next year, down from 5.4% in 2026.
Around two-thirds of the adjustment in the budget would come from spending restraint and one-third from higher taxes and contributions.
Proposed measures include €6 billion of savings each in pensions and healthcare.
Government spending excluding interest and defence would be frozen in cash terms, squeezing budgets after inflation.
Yet, instead of calming investors, it worried them.
Lecornu has no majority in parliament, the National Assembly starts debating the text on 13 October, and a presidential election is due in spring 2027.
Stéphane Colliac, an economist at BNP Paribas, noted that France had already missed its budget targets in three of the four years between 2023 and 2026.
Interest payments and defence spending are both rising, so the government must find savings worth about 1% of GDP just to cut the deficit by 0.4 percentage points, Colliac calculates.
Supply adds to the pressure.
The French Treasury plans to issue €340 billion of debt in 2027, €20 billion more than this year, as pandemic-era borrowing comes due.
Even if everything goes to plan, Colliac expects debt to rise to 121% of GDP in 2027 and to stabilise only at 124% in 2032.
Enrique Díaz-Alvarez, chief economist at Ebury, said: “The political deadlock in Paris remains very much unresolved,” adding that the proposals had met with scepticism from the fiscal watchdog.
Student protests over underfunded schools have added to the pressure on the government.
Why France's sovereign risk is blowing up now
Beyond the rise in France’s 10-year bond yield to 5%, its widening gap with Germany shows investors are increasingly concerned about French debt.
Its premium over Germany’s equivalent Bund reached 152 basis points, or 1.52 percentage points, returning to levels associated with the 2011 eurozone crisis.
Intesa Sanpaolo strategists, led by Gian Marco Salcioli, argue that the speed of the move matters more than its level.
When yields jump this fast, they say, the fear shifts from the price of borrowing to the risk of not being repaid in full, and France is the clearest example.
"The move tends to transform rate risk into something broader, first and foremost credit risk," Salcioli said in a note to clients.
Díaz-Alvarez said this was "the largest weekly widening in said spread in seventeen years."
Could the crisis spread across Europe?
There are already warning signs.
ING strategists Michiel Tukker and Benjamin Schroeder reported that Italian and Greek spreads over German Bunds had widened by almost 15 basis points during the French turmoil.
“Debt dynamics are no longer deemed only a French problem,” they wrote.
Currency markets are also reacting.
Intesa’s currency analysts Luca Cigognini and Fabio Vacchelli noted that the euro touched $1.1161 in Monday’s Asian trading despite weaker US employment figures.
They warned that French fiscal concerns could push it towards $1.10.
For the ECB, that creates a difficult balancing act.
September eurozone inflation rose to 3.8%, strengthening the case for continued tightening. Meanwhile, stress in government bond markets bolsters the case for pausing and considering support.
“An ECB pause would weigh on the EUR from a rates-spread perspective, although the stabilisation of debt markets would return flows into the currency,” Ana Munera, BBVA’s director of global markets strategy, said.
The ECB does have a targeted bond-purchase tool, the Transmission Protection Instrument, to counter unwarranted market disruption.
But support depends on factors including debt sustainability and fiscal-policy compliance.
It is not an unconditional guarantee of French borrowing costs.
Such purchases can address disruptive differences in borrowing costs between countries without requiring the ECB to cut its main interest rates.
So how dangerous is it?
The immediate risk is that political deadlock prevents France from passing a budget.
BBVA's Munera warns that Lecornu could fail to secure sufficient parliamentary support and be forced from office.
Without an approved budget, France would again rely on an emergency law to maintain essential government financing, as it did in 2025 and 2026.
Each new delay has a price.
BNP Paribas' Colliac estimates that if serious deficit cuts slip to 2028, debt would reach 126% of GDP by 2032.
With borrowing needs of €340 billion next year, every extra tenth of a percentage point on France’s borrowing costs adds up quickly.
There are also reasons not to panic.
France is not a country that has lost access to markets. It is a country whose lenders want to be paid more and want to see a plan they can believe.
The first parliamentary test of that credibility begins on 13 October, when the Assembly starts debating the budget.
