“There, but for the grace of God, go I.” CHRISTIAN PROVERB
This well-known proverb, often linked to 16th-century English Reformer John Bradford, expresses humility, empathy and gratitude by acknowledging that someone else’s circumstances might well be our own.
In this case, it applies to the serious recent financial problems in France that might well apply to our country if we’re not careful.
A Wall Street Journal headline, “After Years of ‘Magic Money,’ France becomes a debt bomb,” described how France is at the edge of a dangerous financial spiral as a global surge in interest rates has exposed it as one of the European Union’s weakest links.
France’s debt hit roughly 119% of its Gross Domestic Product. The country already has serious financial problems, yet high school students are marching the streets for more education spending even as the government looks to cut spending.
Over the years, a combination of tax cuts and massive government spending during COVID-19 created more deficit spending.
For years, extraordinarily low interest rates made government borrowing almost painless. That era is over.
French government bond prices have fallen in a dramatic sell-off, pushing its 10-year borrowing costs to the highest level since 2002.
Higher interest rates add to the country’s already bloated budget, and France has more than $1 trillion in debt coming due by 2030.
Interest payments are already one of the French government’s largest line items and will likely exceed its military spending.
Investors are demanding substantially higher yields as France now pays more to borrow than former financial hot spots like Greece and Italy.
Bond markets have a way of enforcing financial discipline when countries fail to do so on their own.
We are seeing this in France, just as we saw in Greece, which was forced to change their ways after a very painful debt crisis.
Greece’s was like a slow-motion movie, with a severe decade-long economic collapse that began in 2009. In fiscal year end 2010, Greece had a budget deficit of 13.6% and debt-to GDP of almost 130%.
More deficits led to more borrowing and investors demanding higher interest rates, and things spiraled out of hand.
In exchange for a multibillion-euro rescue package from the International Monetary Fund, Greece was forced to make harsh pension cuts and public wage reductions, along with implementing steep tax hikes.
The Greek economy shrank by roughly 25% and unemployment soared past 27%, leading to widespread protests.
The good news is that after the awful economic pain, Greece now runs a budget surplus and is reducing its debt-to-GDP ratio.
To be fair, France is not Greece. Greece had surrendered monetary sovereignty to the European Central Bank and had little ability to respond when investors lost confidence.
Greece lost market access and required international rescue programs. France remains a major advanced economy with substantial market access and considerably stronger institutions.
But you cannot help but notice the parallels. And global bond investors have noticed.
Often referred to as “vigilantes,” bond investors can inflict incredible pain on spendthrift nations, and the recent movement in French debt has caught the attention of markets around the globe.
Interestingly, France’s budget deficit is only surpassed by the United States among its peers, which saw our national debt pass the $40 trillion mark recently.
Interest rates on U.S. Treasury securities have been rising, too, with the benchmark 10-year over 5.2% as of Oct. 7.
Interest on our national debt has now surpassed the defense budget and there appears to be little or no appetite in Congress or with President Donald Trump’s administration to deal with our own budget problems, including a $1.9 trillion 2026 deficit equal to 5.8% of GDP.
I have written about this issue several times while our politicians continue paying lip-service to the issue but take no true action to course-correct.
Our nation should learn from Greece and France that a crisis can occur when investors suddenly decide that the trajectory is no longer sustainable.
Governments can ignore deficits for years. Bond investors eventually cannot.
The question is “how long can the United States run large deficits while maintaining investors’ confidence in our debt and its ability to reduce deficits.”
So, while France isn’t Greece, America isn’t immune either.
There, but for the grace of God, go we.
