As concerns grow that turmoil in France's government bond market could spread across Europe, the expansion of the French government's fiscal deficit and rising interest rates have become the focus. This article examines factors behind the spillover, including developments surrounding the ECB's Transmission Protection Instrument (TPI) and preparations by the Bank of Japan for a rate hike.
France has chronic fiscal deficits, and its 10-year bond yield briefly rose to 4.994%, close to 5%. The euro-dollar exchange rate fell to levels not seen since May 2025.
The widening fiscal deficit is also driving up government debt as a percentage of GDP. IMF estimates show that net interest payments are expected to swell from 1.2% in 2020 to 3.3% in 2031.
The supply-demand balance for French government bonds has deteriorated. The ECB has ended reinvestment, reducing support purchases by the Banque de France, while Japanese purchases are shifting. In 2027, France plans to issue a record €340 billion.
Although preparations for the ECB's TPI are progressing, the French authorities are reportedly not seeking support. Discussions are continuing on measures to stabilise the weakening market, on the assumption that fiscal rules will be observed.
The impact on the yen could contribute to a stronger dollar and weaker yen through further euro depreciation. The Bank of Japan is reportedly considering steps to prepare the market for a rate hike in December.