France debt crisis: Bond investors have rendered a ‘guilty’ verdict and are pricing in growing odds of a sovereign default, analyst says

France's soaring debt levels have caused bond investors to express growing concerns about the country's ability to manage its finances, according to an analyst. Thierry Wizman, a global FX and rates strategist at Macquarie Group, said in a recent note that the cost of insurance against a French default has reached its highest level among major EU nations and the UK.

France's five-year sovereign credit default swap rose to 81 basis points, while its 10-year bond yield climbed to 4.989%, the highest since 2002. The premium over equivalent German yields widened to 152 basis points, the highest since the 2011 eurozone debt crisis. Wizman warned that the widening spread between French and German bonds indicates higher sovereign default risk in France.

Despite a temporary dip in the metrics, France's fundamentals remain troubling, with anemic GDP growth, an estimated 5.4% budget deficit of GDP, and rising debt-service costs. The government's latest plan to halt the surge in bond yields has failed, as investors have doubts about its credibility. The analyst's warning comes as France faces a potential default, with a far-right or far-left presidential candidate set to win the upcoming election.

Neither candidate is known for fiscal conservatism, with Jean-Luc Melenchon, a far-left candidate, proposing to cancel the central bank's holdings of French debt, and Marine Le Pen, the far-right leader, proposing tax cuts and a lower retirement age. Wizman believes that an outright default is a low-probability event, but an RN-led presidency, with adverse influence on the 2028 budget and credit-risk perceptions, is a high-probability event, near 50%.

The presidential campaigns are just beginning, and the rhetoric around France's debt, potential default, and budgetary politics is expected to intensify, further damaging the government's creditworthiness.