Vanguard has warned that France's "degrading" credit rating is pushing its borrowing costs higher, as investors worry the government cannot close its budget deficit. The asset manager says next year's presidential election could deepen the strain, with France's 10-year yield already posting the biggest jump among G7 nations since the Iran war began.
Vanguard, which manages $12tn in assets, says France's weakening creditworthiness will likely drive its borrowing costs even higher. Ales Koutny, the firm's head of international rates, told the Financial Times that investor demand for French debt could evaporate quickly if the country becomes a focal point of political crisis.
Yields hit a post-2008 high
France's 10-year borrowing costs have risen from 3.2% to above 4.8% this week, a post-2008 high, before hovering above 4.74% on Wednesday. The spread over German debt briefly rose above 1.2 percentage points on Wednesday, the first time since 2012. France now pays more than 0.2 percentage points more to borrow than Italy, a record spread in data stretching back to the 1990s.
Koutny described France as a long-term degrading credit and said a Germany spread above 1.5 percentage points is a strong possibility if the fiscal situation worsens. He compared the dynamic to Italy's spread widening by more than two percentage points after its inconclusive 2018 election.
Election and budget battle loom
Vanguard warned the April presidential election could further darken the outlook if candidates from the far left to the far right refuse to back unpopular spending cuts, raising the risk of more credit downgrades. Prime Minister Sébastien Lecornu, meanwhile, faces a budget battle that could topple his minority government. Bond investors have responded poorly to his proposed €54bn savings drive, and his chances of passing it through a hung parliament appear slim.
Scope downgraded France earlier this month to A plus from AA minus, citing persistently high fiscal deficits and a growing public debt burden. TD Securities rates strategist Pooja Kumra said that "Markets have grown increasingly anxious about fiscal metrics,"
Deficit widens as growth slows
The government has said its deficit will widen to 5.5% of GDP this year, well above its 5% target, while slowing growth has complicated efforts to improve the country's finances. Agence France Trésor said it plans to sell €340bn in medium- and long-term debt net of buybacks next year, a record issuance and roughly a 10% increase from 2026.
Not every investor is retreating. Royal London Asset Management fund manager Gareth Hill said the firm has bought into the recent jump in French yields, betting the debt will outperform Italy's and Germany's, and added that much of the concern over France is already reflected in the price.
Source: Financial Times
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