French 10-Year Bond Spread Exceeds 1% over German Benchmark
French 10-year bond spread breaches 1% threshold. Italian debt hits 139% of GDP. ECB rate hike risks rise.
The spread between French and German 10-year sovereign bonds exceeded one percentage point on September 18. This level has not been seen since the peak of the Eurozone debt crisis. The French 10-year yield reached 4.46% as investors demanded higher premiums.
France faces the most acute fiscal pressure in the region. Public debt is projected to reach 119.3% of GDP in 2026. This figure rises from 115.7% in 2025. The ratio is expected to climb further to 121.7% by 2027.
French fiscal deficit remains high
The French fiscal deficit is forecast at 5.4% of GDP for 2026. Prime Minister Sébastien Lecornu announced a 54 billion euro spending cut for the 2027 budget. Political fragmentation in parliament complicates the passage of these measures. Public discontent over living costs adds to the difficulty.
Italian debt levels set new record
Italy carries a larger stock of public debt than France. The debt-to-GDP ratio is expected to reach 139% in 2026. Finance Minister Giancarlo Giorgetti warned that debt servicing costs are rising at an alarming pace. This level makes Italy the most indebted sovereign in the Eurozone.
Despite the high debt load, the Italian fiscal deficit remains lower than France's. Rome targets a budget shortfall below 3% of GDP. This goal aims to end the EU's Excessive Deficit Procedure. The 3-year BTP yield hit 3.43% at a recent auction. This is the highest level since June 2024.
Rising capital costs impact budgets
Both nations face rising borrowing costs amid subdued economic growth. The German 10-year Bund yield hit 3.57% on September 15. This was the highest level since June 2009. Higher yields on maturing debt increase the interest burden for sovereigns.
Market expectations for additional ECB rate hikes have risen. Energy price rallies have driven this shift. According to GN auto markets/bonds: sovereign debt, the macroeconomic climate could worsen if energy commodities remain elevated. The ECB must evaluate broader economic metrics when deciding on policy.
