• France faces a slow fiscal squeeze as high borrowing costs consume a growing share of the budget, warns Banque de France Governor Emmanuel Moulin.
  • The 10-year yield has risen to around 4.5%–4.9%, the highest since the global financial crisis era, with the spread over Germany near 110 basis points.
  • Moulin urges a credible budget to put the deficit and debt trajectory downward before investor confidence deteriorates further.

Rising Yields Threaten Fiscal Space

France is not facing an immediate funding freeze, but the state could be progressively squeezed as high borrowing costs eat into the budget, according to Emmanuel Moulin, the newly appointed governor of the Banque de France. In comments to the Financial Times, Moulin warned that without a credible fiscal path, the government risks being “strangled by interest rates.”

The yield on France’s 10-year sovereign debt has climbed to roughly 4.5%–4.9%, the highest range since the global financial crisis era. The spread over German bunds stood just under 110 basis points in late September, signaling that investors are pricing in distinctly higher French fiscal and political risk.

While French Treasury bond auctions remain well subscribed, the danger is a slow-moving fiscal squeeze: maturing debt is refinanced at much higher rates, interest costs rise, and less fiscal room remains for investment or public services. Moulin’s central message is as much political as financial: France needs an enacted budget that puts the deficit and debt trajectory on a downward path before confidence erodes further.

Budget Battle Looms

The warning comes as Prime Minister Sébastien Lecornu’s government has put forward a 2027 draft budget that aims to reduce the deficit from an expected 5.4% of GDP in 2026 to 5.0% in 2027. The plan includes tax and levy increases, reductions in selected tax breaks, tighter controls on some social and health spending, and an effort to slow public-spending growth. It also preserves or raises several priority expenditures, including defense.

But the proposal faces an uncertain passage through a fragmented parliament, with the minority government lacking a reliable majority. The government is asking local authorities to contribute a €5.4 billion budget effort; local-government representatives have publicly warned that this could severely constrain them. The budget arrives ahead of the 2027 presidential election, adding political sensitivity.

“We are not facing a funding freeze, but we could be progressively strangled by interest rates if we do not act,” Moulin said, according to people familiar with his remarks. He rejected the idea that the European Central Bank can substitute for domestic fiscal decisions, arguing that while ECB crisis tools exist, they do not remove the need for government and parliament to restrain deficits and demonstrate a credible policy path. A spokesperson for the Banque de France declined to comment beyond Moulin’s public statements.

The Debt Math

France’s challenge is the combination of a large inherited debt stock, persistent annual deficits, weak growth, and a sharp reset in global interest rates. Public debt stood at about €3.596 trillion at end-June 2026, roughly 119% of GDP. The interest burden is currently around €70 billion, but the 2027 budget projects it will rise to €91 billion, up €12 billion year-on-year. Interest is largely non-discretionary, crowding out other spending choices.

Growth remains sluggish: the Banque de France forecasts just 0.4% for 2026 and 0.9% for 2027. Low growth makes it harder to stabilize debt relative to GDP and reduces tax-revenue momentum. The government projects debt rising to 121.7% of GDP in 2027. Even if the deficit narrows slightly, stabilizing debt will require a more sustained improvement in the primary balance, stronger growth, lower funding costs, or some combination of all three.

BNP Paribas (BNP.PA) research estimates that interest expenditure could rise from 2.2% of GDP in 2025 to 3.6% by 2029; it also estimates that an additional 50-basis-point increase in rates would add meaningfully to the burden over time.

Not a Repeat of 2008

Moulin argues that the current period is not a replay of 2008. French and European banks are, in his assessment, well capitalized and liquid, and France continues to access bond markets. The nearer historical warning is the euro-area sovereign-debt period of the early 2010s, when countries including Greece, Ireland, Portugal, Spain, and Italy faced acute strains and had to undertake painful adjustments.

The rise in yields is not wholly French. Moulin points to a global rise in long-term rates driven by inflation expectations, high government borrowing needs, and substantial debt issuance by large technology companies. France’s additional premium reflects its relatively weak fiscal position and domestic political uncertainty. External shocks have added pressure: higher oil prices and wider geopolitical disruption, as well as weak activity early in 2026 due to aerospace disruptions and heat-related effects on the economy, including agriculture.

Moulin also stresses that creditors are not only foreign investors: French households can be exposed through vehicles such as life-insurance products and regulated savings instruments. His argument is that fiscal credibility protects domestic savers, taxpayers, and the capacity to finance future public investment—not merely international market sentiment.

What to Watch

The decisive near-term event is the parliamentary budget process. A credible package of spending restraint, revenue measures, and realistic macroeconomic assumptions could limit further widening in French-German spreads. Failure to pass a budget—or a budget seen as politically reversible—could push borrowing costs higher, especially as the presidential campaign intensifies.

The ECB is unlikely to be treated as an automatic backstop for France’s fiscal choices; its intervention tools are conditional and designed for severe market dysfunction, not routine deficit financing. Moulin’s view is that France is presently in a gradual fiscal erosion, but that inaction—especially amid election-related political instability—could make a sudden sovereign-debt crisis more plausible.

Correction: An earlier version of this article misstated the deficit projection for 2026. It is expected to be 5.4% of GDP, not 5.0%.