why is France now borrowing at a higher rate than Spain?

Unheard of in eighteen years. For the first time since November 2006, the rate at which France borrows ten years on the debt market exceeded that of Spain on Thursday September 26. “According to the latest data, France’s borrowing rate stands at 2.9%, compared to 2.88% for Spain”details for franceinfo Stéphanie Villers, specialist in the euro zone and economic advisor at PwC France.

The ten-year borrowing rate is “considered as the reference rate by the financial markets”explains the expert. It reflects investors’ confidence in a country’s ability to repay its debt. Traditionally, the debt of the most economically powerful states is granted lower rates. This switch between the rates demanded in Madrid and Paris therefore means that investors consider it a little safer to hold Spanish debt than French debt.

For several years, the gap between France’s borrowing rates and those of southern European countries has tended to narrow. With a loan maturity of five years, French debt is also now trading at a higher rate than for Spain, Portugal and Greece. At ten years, the French rate is lower than that of Athens, but higher than those of Lisbon or Madrid. “Overall, there is a movement towards improvement in these countriesanalysis from AFP Aurélien Buffault, director of bond management at Delubac AM. Greece, for example, went bankrupt in 2012, but twelve years later, the gap between French and Greek borrowing rates [à dix ans] is now only 0.16 percentage points”he points out.

A trend which is partly explained by the sustained growth from which these countries benefit. Spain is “become once again one of the locomotives of the euro zone”, deciphers Aurélien Buffault. The Bank of Spain anticipates growth of 2.8% by the end of the year, a level well above the average for the monetary zone (0.8%, according to the ECB). In France, INSEE forecasts an increase in gross domestic product (GDP) of 1.1%.

At the same time, the countries of Southern Europe have also taken measures to “promote the consolidation of public accounts”underlines Stéphanie Villers. “In 2010, Portugal had a budget deficit of 10% of its GDP, but the country has made the necessary efforts, especially over the last five years”says Christopher Dembik, investment strategy advisor at Pictet AM, with The Tribune. “Thus, in 2017, the gap with France on 10-year rates was 300 basis points while in recent days, it was 20 basis points… and this time in favor of Portugal”he notes.

France, conversely, observes a “continued deterioration of its public accounts”continues Stéphanie Villers. The French public deficit “risk of exceeding” 6% of GDP in 2024, compared to 5.1% initially expected, according to the Minister of the Budget. “The situation of our public finances is serious”conceded Laurent Saint-Martin on Wednesday before the Assembly’s Finance Committee. For comparison, the Spanish government intends to bring the deficit below 3% by the end of the year.

“France has already experienced a deficit of such magnitude, particularly during the Covid crisis, because the State had massively intervened to cover part of essential expenses, such as partial unemploymentrecalls Stéphanie Villers. However, today, there is no reason why the deficit should be so abysmal compared to other European countries. This is what worries the markets.” argues the economist.

These forecasts are all the more scrutinized by the markets as France is the subject, along with seven other countries (Belgium, Hungary, Italy, Malta, Poland, Romania, Slovakia), of an excessive deficit procedure before the European Commission . The government has until October 31 to present to Brussels its trajectory for restoring public accounts.

The political uncertainty of recent months is also questioning investors about France’s ability to redress its accounts. “For now, even if the appointment of Michel Barnier as Prime Minister may have reassured the financial markets, the fact remains that the presentation of the budget for 2025 is dragging,” underlines Stéphanie Villers. The finance bill, traditionally sent to Parliament before October 1, will only be presented “the week of October 9“warned Laurent Saint-Martin.

“This urgency and lack of visibility is making markets start to worry.”

Stéphanie Villers, economist

at franceinfo

However, should we be worried about this increase in the borrowing rate? “Although there is uncertainty over the budgetary situation (…), the French debt still finds buyers”reassures The Tribune Jérôme Creel, economist at the OFCE, who assures that France has no difficulty borrowing.

This increase will, however, “penalize us in the long term”, nuance Stéphanie Villers, because it will further increase the sums spent by the State to repay its debt. However, the debt burden, that is to say the payment of interest alone, should already increase from 46.3 billion euros in 2024 to more than 72 billion in 2027, according to the stability program drawn up by the previous government in April. “The interest on the State debt would thus be closer to the expenditure of National Education by 2027, the first budgetary item with 87 billion euros”warned in July a report from the Senate Finance Committee.

At this stage, France’s situation is still far from the debt crisis in the euro zone at the turn of the 2010s. At the time, “rate spreads had increased much more”recalls Eric Dor, director of studies at IESEG, West France. “But be wary. We must not provoke the markets too much”he warns. This increase in the borrowing rate constitutes for the moment “a first alert”says Stéphanie Villers. “But if the 2025 budget does not pass, if there are tensions which lead to a motion of censure and a resignation of the government, then there will be a risk of additional tension”judges the economist.