France's 10-year borrowing cost tops 5% for the first time since 2002 ahead of Moody's rating review

The yield on France’s benchmark 10-year government bond (OAT) rose above 5% on Wednesday, 21 October, for the first time since 2002, Euronews reported, and Reuters said it crept higher again on Thursday.

Wider gap with Germany

The spread over German 10-year debt, the euro zone’s benchmark, widened to about 165 basis points on Thursday, the widest since 2011, according to Reuters columnist Mike Dolan. Because the OAT is used to price many loans, higher yields could push up borrowing costs for French companies and households, Euronews noted.

Budget and rating

Investors are worried about public finances. Debt stands at around 120% of GDP, and Prime Minister Sébastien Lecornu is trying to pass a 2027 budget with €43 billion of spending cuts without a parliamentary majority. Even if approved, the budget would only bring the deficit down to 5% of GDP next year, above the EU’s 3% limit, Euronews said.

Moody’s is due to review France’s Aa3 sovereign rating on 23 October. The agency has a negative outlook, meaning a downgrade is more likely than an upgrade, Reuters said. Markets are also watching the street unrest: after last weekend’s violence, President Emmanuel Macron pledged on Wednesday to prevent a repeat, with more protests planned.