French bond yields hit 24-year high as Moody's downgrade looms

French ten-year sovereign bond yields rose above 5% this week for the first time since 2002, as markets priced in a possible Moody's credit-rating downgrade expected after Friday's close.

The risk premium on French bonds over German Bunds widened to around 1.6 percentage points — the highest level in 15 years — reflecting growing concern about France's fiscal trajectory. The IMF projects French public debt will reach 118.5% of GDP in 2026, against roughly 86% at the start of the euro-area debt crisis in 2010. The IMF also forecasts a deficit of around 5.4% of GDP this year, well above the eurozone's 3% ceiling.

Volker Schilling of asset manager Greiff Capital told ARD's financial desk that France faces a trilemma: choosing between its welfare state, higher defence spending, and debt sustainability. "All three will not be possible," he said, adding that priorities will have to be set and the market will force that decision.

Stephan Kemper, chief capital markets strategist at BNP Paribas Wealth Management, argued the situation does not amount to a systemic euro crisis. "What we are experiencing here is not a systemic crisis of the euro," he told ARD, but rather a very clear message from the market to a specific country.

In a notable reversal, France is currently paying higher yields than Italy. Schilling concluded: "The new periphery of the eurozone begins at the Seine."