France may be forced to seek a bailout from the International Monetary Fund (IMF) as its government edges toward collapse, the country’s finance minister has warned.
Long-term borrowing costs in France surged to their highest levels since 2011 on Tuesday, amid growing concerns that a second government collapse within a year could leave Paris unable to manage its budget deficit, projected to reach 5.4% of GDP this year.
Finance Minister Eric Lombard acknowledged that requesting IMF assistance “is a risk that is in front of us,” as the country struggles with a record national debt of €3.3 trillion (£2.85 trillion). While France has never previously turned to the IMF, the current political uncertainty leaves it in a precarious financial position.
“It is a risk that we would like to avoid, and one that we should avoid, but I cannot tell you that this risk does not exist,” Lombard said.
The warning comes as opposition parties indicated they would vote against Prime Minister François Bayrou, who called for a confidence vote on his proposed deep budget cuts in an attempt to break the political deadlock. This follows former Prime Minister Michel Barnier’s ouster in a no-confidence vote last December after failing to secure backing for major public spending cuts. Bayrou now faces a likely defeat in the September 8 vote over plans to reduce the deficit by 1.5% of GDP next year.
Rising Bond Yields
Political turmoil has driven the yield on 30-year French government bonds up three basis points to a 14-year high of 4.42%, while 10-year bond yields reached their highest level since March.
Rupert Harrison of Pimco, a bond trading firm, commented: “This ongoing political impasse is not something the market will welcome. French borrowing costs are unlikely to improve in the near term.”
Mohit Kumar, chief European economist at Jefferies, added that he expects “increased volatility and pressure” on French bonds in the coming days.
France’s debt now exceeds the size of its economy, with IMF forecasts suggesting it could reach 116.3% of GDP this year—well above the UK’s projected 103.9%. Despite this, France continues to enjoy lower borrowing costs than the UK, with 10-year yields around 3.5%, compared to 4.8% in the UK.
French banks, heavily invested in government debt, were hit hardest by the turmoil. BNP Paribas shares fell roughly 5%, while Societe Generale dropped over 6%. The CAC 40 index in Paris declined 1.2% on Tuesday, following a 1.6% drop on Monday.
Andrew Kenningham of Capital Economics noted: “The prime minister’s decision to call an early confidence vote is likely to result in his replacement or, less likely, fresh elections. Either way, the budget deficit will remain well above the level needed to stabilize the debt ratio.”
