France falls into Japanese hands

France, considered one of the engines of the European economy, is now facing a serious financial “trap” and mounting economic difficulties. Rising public debt, borrowing costs that continue to climb and a budget deficit are narrowing Paris’s room for manoeuvre. Resistance to reforms is further restricting the government’s ability to act.

The yield on France’s 10-year government bonds has risen from 3.6% to 4.96%. One of the most notable developments is that some Japanese asset managers have withdrawn from French bonds. Although claims that Tokyo has sold all its French bond holdings are inaccurate — Japan’s portfolio still contains approximately $145 billion worth of French bonds — the move itself has already sent a serious signal to the market.

France’s credit rating is also under pressure. In September last year, Fitch downgraded France’s rating from AA- to A+. For comparison, while Italy has a BBB rating, the yield on French bonds (4.96%) has surpassed the Italian figure of 4.7%. A high credit rating alongside a risky yield — this contradiction clearly indicates that investors are increasingly doubtful about France’s financial future.

The most critical aspect of the crisis is the heavy burden debt places on the annual budget. France’s annual interest payments on its debt have reached €79.2 billion, and the figure is expected to rise by a further €11.8 billion next year.

Public debt has reached 119% of GDP. This is almost twice the European Union’s 60% threshold. Paris, one of the EU’s leading powers, is increasingly constrained by the very fiscal discipline it helped establish.

The way out of the current situation is clear: cut spending and stimulate economic growth. However, when the issue runs up against domestic politics, the deadlock becomes even harder to break. Every attempt to save money on the pension system and social spending faces mass protests and political resistance.

At the same time, demographic changes, an ageing population and challenges related to social integration are adding to the country’s burden. However, explaining the fiscal deficit solely through immigration would mean avoiding the root of the problem. The main causes are structural deficits accumulated over many years, poor management of public spending and weakening economic momentum.

Although France is unlikely to go bankrupt overnight, its growing debt burden is weakening the country’s geopolitical and economic weight.

Will governments now take bold steps to restore financial stability despite public discontent, or will this “financial bomb” simply be left for future administrations to deal with?

Jala Rovshan