Pressure to pay interest on French public debt

Since the 1970s, no French government has balanced its budget. Therefore, the country’s public debt has increased year by year, which was limited to 30% of GDP in 1984, now exceeding 113% of GDP, among the highest in Europe.

“There are countless reasons for concern about (the French situation). However, one reason stands out clearly: our country’s high debt situation,” French Prime Minister François Bayrou told parliament on January 13.

According to information from the French National Institute of Statistics and Economic Research (INSEE), as of the third quarter of 2024, the total debt of the state, local authorities and social security in this country increased by 71.7 billion euros, bringing the scale of public debt to a record of 3,300 billion euros.

The higher mountain of public debt leads to a larger interest payment burden. From the mid-1980s to 2020, France’s public debt interest rate decreased steadily, from over 10% to 0% and even went negative. But when Covid-19 ends and the global economy recovers, interest rates increase again, especially from the beginning of December 2024.

On December 13, when Mr. Bayrou was appointed Prime Minister, the interest rate required by international investors on French 10-year loans was below 2.9%. However, by the end of last week, this number had increased to nearly 3.45%.

The government has predicted the situation, but if loan interest rates exceed expectations, France will have to spend more budget to repay debt. In the draft budget presented by former Prime Minister Michel Barnier, interest payments are estimated at 54.9 billion euros by 2025, equivalent to 11% of government spending.

The Ministry of Finance calculates that for every one percentage point increase in interest rates – for example from 3% to 4% – debt repayment costs increase by 3.2 billion euros in the first year and about 19 billion euros in the fifth year. This year, interest payments will be larger than the budget of the French Ministry of Education,” François Villeroy de Galhau, Governor of the Central Bank of France, warned on January 8.

There are two main reasons why French public debt interest rates have increased. First is the trend of increasing interest rates globally. Even this trend is difficult to cool down significantly because US President-elect Donald Trump’s protectionist agenda puts inflation at risk of returning.

However, experts believe that the bigger reason is the country’s own political instability. Since President Emmanuel Macron dissolved parliament on June 9, 2024, many activities have stalled. With no budget and savings plan in place, combined with an out-of-control deficit, international credit rating agencies are increasingly concerned.

Investors sensed the situation and considered France a less reliable borrower, leading to demands for interest rate increases. Even the interest rate that this country pays is higher than the level that Portugal, Spain or even Greece – countries that were on the brink of bankruptcy in the mid-2010s – had to pay.

This week, the risk premium on French public debt – measured by the yield differential between French and German 10-year bonds, traded near its highest level in more than 12 years. The reason is that investors are concerned about political instability and the increasing public budget deficit, according to Reuters.

Mr. Christopher Dembik, investment strategy advisor at asset management company Pictet Asset Management (Switzerland) said that this is not a sudden crisis but a gradual decline. “Credit rating agencies are still quite lenient at the moment. But eventually, they may classify France’s public debt as medium. Many financial institutions will then have to take a closer look and demand interest rates.” higher,” he warned.

According to this expert, the scenario cannot be ruled out that France will fall into a situation similar to the UK, where the market was forced to implement austerity measures. “We may not have seen the worst yet,” said Christopher Dembik. He predicted that interest rates could have risen higher if the European Central Bank had not continued to buy French public debt next December.

On January 13, French Prime Minister François Bayrou said important budget decisions were one of his top priorities a month after being appointed by President Emmanuel Macron.

Mr. Bayrou urgently needs to pass a budget bill for 2025. When the previous government collapsed on December 13, an emergency law was passed to ensure the state could continue to collect taxes from December 1. January 2025 to maintain basic operations and avoid closures.

However, this emergency law is only a temporary solution. Passing an official budget for this year is necessary to reduce the budget deficit and meet key spending requirements, such as strengthening defense amid the conflict in Ukraine.

“Since the war, France has never in its history been in debt as much as it is today. I affirm that it is impossible to carry out any recovery and reconstruction policy without taking into account the debt situation. ours and if we do not set goals to control and reduce debt,” Mr. François Bayrou warned.

Financial markets, credit rating agencies and the European Commission are also urging France to comply with EU rules on public debt limits, to control borrowing costs and ensure prosperity. eurozone. According to the Maastricht Treaty and the Stability and Growth Pact (SGP) that France participated in developing, member countries must keep the public debt ratio below 60% of GDP.

In 2024, France’s budget deficit is estimated to be 6% of GDP. Prime Minister François Bayrou has announced the goal of reducing the deficit to 5.4% in 2025 and further reducing it to 3% – the EU prescribed level – by 2029.