Markets On Edge : How Will France Finance Its Record Debt ?

The French state is preparing to face a year under high tension in the financial markets. With €300 billion to borrow in 2025, an unprecedented level of debt, Bercy must maneuver in a particularly unstable environment. The Agence France Trésor (AFT), responsible for debt issuance, faces a double challenge: to ensure the financing of the country without destabilizing the markets and to reassure increasingly cautious investors. Indeed, political uncertainty further complicates the situation. Since the fall of the Barnier government, France has been operating without a voted budget, which deepens doubts about the country’s fiscal trajectory. A special law adopted in emergency permits the maintenance of borrowings, but this temporary solution is not enough to alleviate concerns. Signs of nervousness are multiplying in the markets. The interest rate spread between France and Germany, a key indicator of investor confidence, has doubled in a year, exceeding 80 basis points. This signal reflects a riskier perception of French debt and could increase the cost of financing. In this climate of uncertainty, Bercy must find the right balance. Will the AFT’s strategy, based on predictability, regularity, and flexibility, be sufficient to avoid an excessive increase in interest rates? With just a few days before the first auctions, pressure mounts on financial officials, while investors await guarantees on the country’s fiscal stability.

A colossal financing need under surveillance

The Agence France Trésor (AFT) is launching its financing program for 2025 in a climate of strong pressure regarding the explosion of debt. As of January 6, it foresees a first auction of Treasury Bills (BTF), short-term debt securities. A few days later, it will put Intermediate Treasury Bonds (OAT) on the market, which generally attract institutional investors due to their longer maturity. Such issuances fit into a well-established strategy, articulated around three fundamental principles: predictability, regularity, and flexibility. Each week, the supply of securities is adjusted based on demand to ensure optimal liquidity in the market.

However, the exercise is proving more perilous than in previous years. France plans to borrow €300 billion in 2025, a historical level that even surpasses that of Italy, often cited among the most indebted countries in the eurozone. This amount marks a significant increase compared to the €285 billion raised in 2024. According to an official statement, the AFT does not rule out adjusting this financing need throughout the year, depending on upcoming budget arbitrations. This uncertainty reflects a particularly tense economic and political situation, in which the state must assume increasing expenditures to control its deficits.

The political crisis shaking France further accentuates the fragility of the fiscal framework. Thus, the fall of the Barnier government left the country without a voted budget for 2025, forcing the executive to adopt an emergency special law to ensure the continuity of public financing. While this measure temporarily allows for maintaining bond issuances, it does not completely reassure investors, who anxiously scrutinize the lack of visibility on the fiscal trajectory.

Since the dissolution, French borrowing rates have continued to rise, leading to a widening spread with Germany. This spread, now exceeding 80 basis points, has doubled in a year, illustrating the growing mistrust of markets regarding French debt. At this stage, Bercy must urgently convince that the situation remains under control, otherwise, the state’s financing cost could increase even further.

Fidgety markets facing political uncertainty

While French debt retains strong attractiveness to investors, budgetary uncertainty begins to weigh on the market. The lack of visibility on public finances encourages more caution, particularly among institutional players. Antoine Deruennes, Managing Director of Agence France Trésor (AFT), nonetheless attempts to reassure. “We will continue to rely on the same principles that have driven our success,” he states. Moreover, he highlights the institution’s capacity to adapt to market conditions. To preserve investor confidence, the AFT bets on a proven strategy, based on the regularity of bond issuances. Each week, auctions for Treasury Bills (BTF) are organized, while Intermediate Treasury Bonds (OAT) are offered biweekly. Such an approach aims to guarantee adequate liquidity and provide buyers with maximum predictability regarding the issuance schedule.

However, critical signals are emerging. Some foreign investors, notably in Asia, are reducing their exposure to French debt. The gradual disengagement could increase pressure on borrowing rates, forcing the state to finance its debt at a higher cost. Christopher Dembik, economic advisor at Pictet AM, however downplays the risk of a sudden shock. “A panic scenario, where demand would be insufficient, remains unlikely, but the cost of financing may be higher,” he analyzes. If this rise in rates is confirmed, it will mechanically increase the burden of debt and further reduce France’s fiscal leeway.

Behind the scenes, market operators monitor the evolution of issuances with heightened attention. In 2024, the AFT managed to close its borrowings at an average rate of 3.06%, slightly lower than the 3.16% recorded in 2023. However, the year 2025 could reverse this trend and mark a turning point in the country’s financial trajectory. Investor confidence will largely depend on the budgetary decisions taken in the coming months. As negotiations around the future budget advance, markets are waiting for clear signals regarding the state’s ability to stabilize its finances. Without credible commitments, French debt could become a more costly burden than expected, with lasting repercussions on the country’s economy.

The threat of a sustained rise in interest rates raises serious concerns, both among economists and within political circles. So far, France is managing to finance itself without difficulty, but a prolonged deterioration in the market climate could quickly reduce its budgetary leeway. This situation transcends national borders. A rise in tensions regarding French debt would undermine the entire eurozone, exposing its partners to a risk of contagion. Despite these uncertainties, the state adopts a reassuring discourse and relies on the stability of its issuance strategy. However, this posture will not suffice indefinitely. As the year progresses, investors will demand clear commitments regarding the country’s fiscal trajectory. Without a credible response, debt could quickly become a far more expensive burden, with heavy consequences on the French economy and market confidence.