Last week France briefly paid more than 5% to borrow for ten years. It hadn’t done that since 2002. By Tuesday’s close the yield was back to 4.922%, a touch under the U.S. Treasury’s 4.992%. James Mackintosh’s Streetwise column on Monday argues that relief is the problem. Yields aren’t yet high enough to make France take its debt seriously, and the arithmetic hasn’t moved.
Here’s his math. France runs a budget deficit of about 5% of GDP. Nominal growth, which means real growth plus inflation, should be 3% at the very most. Taxes grow with the economy, so on that math France adds new debt worth about 2% of GDP a year. But the cheap debt from the zero-rate years is maturing, and new debt costs far more. Mackintosh runs the worst case. Pay 5% on the whole pile, and the debt grows by 4% to 5% of GDP a year. Net debt is already set to pass 111% of GDP this year, by the IMF’s forecast.
The fix isn’t a mystery. The state already collects 52% of GDP in taxes and other revenue. Among rich countries, only Norway and Finland take more. So the cut has to come from spending. A believable ten-year plan would probably calm the bond market. The hard part is political. Roughly half of voters think the other half can pay. Polls point to Marine Le Pen of the National Rally for next spring’s election. She has backed a pension age of 60, down from 62. Her party helped undo President Macron’s rise to 64 last year. We don’t take sides. Parliament is split three ways, and no president controls it automatically.
What’s new since last week
The street is louder and the state is poorer. More than 400,000 people marched Saturday, mostly peacefully, Noemie Bisserbe reported Tuesday. The government answered with a cap of 28 students on first-year high-school classes, 15,000 new university places and €4 billion ($4.4 billion) in loans to fix schools. Tom Fairless laid out why the money is tight. France spent €0.15 billion on energy relief this year against Germany’s €1.62 billion, by Bruegel’s count, so utility bills are landing late and hard. A government report found 32% of the education budget goes to pensions for retired staff. Debt hit a record €3.5 trillion at the end of the first quarter.
Our read
This is Fixed Income, IN02. A bond is a promise, and its price depends on whether the borrower can keep it. France’s yield eased this week, and the paper doesn’t say why. A few calm days don’t change the math. The ECB would likely step in long before a real panic, Mackintosh says, and we agree a crisis isn’t close. His last line is that it isn’t only France that needs to get serious. Our own 10-year sits at 4.992%, and the IMF expects a bigger U.S. deficit than France’s this year. We hold Europe through broad funds. VGK is held at weight in 11 books, VEA in 9, EFA in 5 and EZU in 3; nothing added. None of them singles out France.
The one thing to check is the bond side of your own plan. This week, open your bond fund’s fact sheet and look at its average maturity and its country mix. A long bond pays you more for lending longer, and it falls harder when the borrower’s math stops closing. France’s cheap debt from the zero-rate years felt safe too, until it had to be replaced at 5%. Nobody fixes the gutters in the rain. The dry week is the time to look, and we’re glad to go through the bond sleeve with you.