Wall Street analysts have warned that France’s worsening debt crisis could trigger a wider European “doom loop”, as rising government borrowing costs, political unrest and weak growth reinforce one another.
Concerns about French finances have spread beyond the country’s bond market, with investors assessing whether higher yields could affect other asset classes and sovereign debt markets. “What happens in Paris doesn’t stay in Paris!” Peter Schaffrik and his team at RBC said in a note to clients.
The analysts said France was at the centre of the latest market moves, but argued that the underlying pressures were broader. Europe was already facing an energy crisis, high inflation, heavy government debt and weak growth, all of which had encouraged bondholders to demand higher returns for lending to governments.
Those higher yields make it more expensive for states to borrow, potentially weighing on economic growth and creating further pressure on public finances. Investors who had borrowed money to bet on French bond prices may also now be forced to sell, intensifying the market decline.
France’s debt crisis and the risk of a political feedback loop
Analysts at Macquarie issued a more severe warning, saying France was “veering toward a full-blown civil crisis”. Thierry Wizman and Gareth Berry argued that a direct connection could be drawn between rising French bond yields and street protests in recent days.
The demonstrations have involved school students and others angry about a lack of spending on education. Macquarie said prolonged unrest could increase pressure on the government to approve additional spending, worsening the country’s debt position.
That prospect could push bond yields higher, making it more costly to finance the new spending and potentially aggravating the concerns behind the protests. The analysts described the relationship between political unrest and borrowing costs as a “doom loop”.
French Prime Minister Sébastien Lecornu has said he will present new fiscal proposals at the end of October, leaving protesters the rest of the month to increase pressure on the government.
Italy is also adding to investor unease. Goldman Sachs analyst Filippo Taddei said the country had revised up its forecasts for the budget deficit in 2027 and 2028 to 3.4% and 3.2% of gross domestic product respectively, from earlier estimates of 2.6% and 2.4%.
He said the revised path had surprised most market participants and exceeded the government’s April targets by a combined 1.2% of GDP.
The concerns matter beyond Europe because 10-year government bond yields across major Western economies tend to move together. A rise in borrowing costs in France could therefore contribute to wider pressure on sovereign debt markets, even as yields on 10-year French and US bonds fell over the latest 24-hour period.
Markets showed signs of steadier trading after a technology-led sell-off. The Nasdaq 100 fell 1.39% in the previous session, while early trading saw the Stoxx 600 rise 0.86% and the FTSE 100 gain 0.83%.
