Why France’s Economy is Facing a Massive Shift

Assumption 1.

France borrows like Germany.

For most of the Euro's life, lending to France felt almost as safe as lending to Germany.

The two were the Eurozone's founding couple, the core, and markets priced them that way.

Here's how wide the gap once was between France and the countries people actually worried about.

In July 2012, at the height of the Eurozone debt crisis, Italy's 10-year borrowing cost was more than 4 percentage points above France's.

France was the dependable one.

Italy was the one having the crisis, even losing its gold-plated AAA rating that year barely registered.

Moody's cut France from AAA to AA1 in late 2012, following an S&P downgrade in January.

Yet French yields were trading at record lows, just over 2%.

Investors shrugged.

France was France, now jump to 2026.

On Friday 18th September, the gap between French and German 10-year borrowing rates hit a full percentage point, a level not seen since 2012.

At a yield of about 4.5%, France was now paying more to borrow than Greece and Italy.

Read that again.

More than Greece, the country that needed three bailouts.

And it didn't stop there.

On October 1st, the day the 2027 budget was presented, France's 10-year yield briefly touched 4.96%, its highest since 2002.

That came right after the third quarter delivered the sharpest rise in French yields in almost 40 years.

Here's one snapshot from a week later.

On October 6th, Italy's 10-year bond yielded 4.61%, Spain's 4.10% and France's 4.85%.

In 2012, Italy was paying four points more than France.

Now France is paying about a quarter of a point more than Italy.

As of the latest data, France's 10-year rate stood at 4.79% on October 16th, against 3.42% for Germany's Bund, a gap of about 137 basis points.

So what is this spread, and why does anyone care? Think of it like a mortgage rate tied to your credit score.