In the spread derby, Italy and France are now tied.

By Giampaolo Galli, Gianmaria Olmastroni****In 2020, France's spread was among the lowest in the Eurozone, but has widened in recent years, while that of other countries, once considered riskier, has narrowed: French bonds now carry interest rates higher than those of Greece and Spain and equal to those of Italy. Despite generally favorable interest rate and GDP growth trends, continued high primary deficits have pushed the debt-to-GDP ratio to 113%. With unchanged policies, the ratio is projected to rise to 135% in 2034. The political crisis makes a lasting recovery in public finances unlikely, unlike in Italy, which, according to markets and rating agencies, appears determined to bring debt dynamics back under control.

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On September 8, for the first time in the history of the Fifth French Republic, founded in 1958, a government fell not because the parties challenged it by passing a motion of censure, but because the Prime Minister took the initiative to ask for a vote of confidence, and did not obtain it. François Bayrou's government fell after having submitted to a vote of confidence a budget law with cuts of over 40 billion. The now ex-Prime Minister expressed strong concern about the state of public finances, the recovery of which would be a "matter of vital urgency". [1] Meanwhile, the interest rate on French bonds has risen and has almost reached that of Italian bonds, despite our debt being higher (135% of GDP versus 113%). This note describes why the markets are worried, why Italy, unlike France, is regaining credibility, and how the latter came to have such a high debt.

The spread and ratings

In 2020, France's spread was among the lowest in the Eurozone (50 basis points): this means that the risk attributed to French bonds was only slightly higher than that of German bonds, considered the safest. [2] In recent years, the French spread has risen, while that of other countries, once considered riskier, has fallen (Fig. 1): Spanish bonds have had lower interest rates than French ones since October 2024; since June this year, even the spread of Greece, whose debt is at 150% of GDP, has been lower than the French one. Now the spread of French bonds is 79 basis points, very close to the Italian one (84), which is falling: France could soon become the Eurozone country with the highest spread.

Rating agencies are also reviewing French bonds, once rated AAA (the best possible rating). The rating, already lowered during the 2011-12 debt crisis, was further downgraded during 2024, when Macron dissolved parliament and called early elections, and is now in the lower part of the first band (AA- for S&P and Fitch, Aa3 for Moody's, Fig. 2): this means that the bonds are still considered high quality, but with the risk that public finances will deteriorate, and with them creditworthiness. [3] The downgrading of the rating is a strong signal, because the agencies, in their assessment, consider economic fundamentals more than temporary "rumors", and therefore they lower the rating only rarely, when the data suggest an actual and lasting deterioration of public finances. [4]

In the specific French case, the agencies' concerns are:

The political crisis, which to date makes a lasting recovery of public finances unlikely. Since January 2024, France has had three governments: the fall of the first (Attal) was followed by early elections, which had not taken place since 1997; the second (Barnier) and the last (Bayrou) both fell after proposing a budget law aimed at reducing the deficit. [5]

The gap in recent years between the actual deficit and the target set in the budget law. In 2023, the deficit was 5.4%, instead of the projected 4.9%; in 2024, 5.8% instead of 4.4%; the target for 2025 is 5.4%, which, according to the latest International Monetary Fund (IMF) forecasts, should be met.

A further increase in interest expenditure, which would further increase the deficit and debt.

The weakening of growth, due both to the fragmentation of global trade resulting from tariffs, and to the crisis in Germany, the main trading partner. [6]

Italy has a worse rating than France, sitting in the third band (BBB+ for S&P, BBB for Fitch and Baa3 for Moody's), the lowest level of the "Investment grade" category: below this level, bonds are considered "speculative" as the risk of insolvency becomes significant. However, Italy's rating is improving, as the agencies positively evaluate the Minister of Economy's determination to bring debt dynamics back under control; furthermore, the current government is already one of the longest-lived ever and its fall appears unlikely at present. Finally, in 2024 the deficit (3.4%) was lower both than the target set at the beginning of the year (4.3%) and the forecasts of various institutions, thanks to a better-than-expected revenue trend. [7]

Unlike France, Italy is in a stable political situation and is attempting to reduce its debt. In France, the majority in the Chamber of Deputies, which rejected the Bayrou government, declares its opposition to the measures needed to slow the growth of the debt.

The dynamics of French debt

Since the Second World War, French public debt has been stable at around 20% of GDP until the 1980s, when it increased to 37% in 1990, a low level by today's standards, but sufficient at the time to induce markets to demand higher yields. Precisely because of the perceived riskiness of French debt, in the 1990s the difference between the interest rate (i) and the growth rate (g) was very penalizing and was the main cause of a further growth of the debt/GDP, combined with a slight primary deficit (0.6% on average over the decade, Table 1). The ratio reached 60% in 2000 (Fig. 3). [8]

After the introduction of the euro, fiscal policy was more cautious (primary budget balanced on average in the period 2000-2007), with a slight increase in debt up to 65% in 2007, due to a still positive snowball effect. [9]

Between 2008 and 2013, with the two crises, the ratio rose significantly: a positive snowball effect contributed to this, due to the 2009 recession and the low growth of the following years, but the main cause was the high primary deficits (Fig. 4). The debt-to-GDP ratio thus reached 95% in 2013.

From 2014 to 2019, despite very low interest rates, the IG gap was only slightly favorable (-0.3% on average), due to low growth. The fact remains that even with modest primary surpluses, the ratio would have declined again. During those years, however, France continued to run primary deficits (1.5% on average, much higher than in previous "quiet" periods), gradually pushing its debt to 98% in 2019.

In 2020, with the collapse of GDP due to Covid, the ratio rose by 17 percentage points, an increase similar to that seen in other European countries. However, France's primary deficit has consistently been among the highest of the major European countries, ranking first in 2023 (3.5%, tied with Italy, against a Eurozone average of 1.6%) and especially in 2024 (3.7% compared to a Eurozone average of 1.2%, Fig. 5). Consequently, France is the only major Eurozone country whose debt-to-GDP ratio remained roughly the same as in 2020 (Fig. 6).

The increase in the deficit

In the long run, the increase in the deficit appears to be due not to a decrease in revenue but to an increase in spending, particularly after the 2008 crisis (Fig. 7). In the previous decades, spending had remained around 50% of GDP. The high level reached between 2009 and 2013 (54.6% on average) to support the crisis-ridden economy was prolonged in the following years (55.3% on average between 2014 and 2019). Revenue also increased compared to the crisis period (51.7% on average versus 53.7% in 2014-2019), but not enough to bring the primary deficit back to its pre-2008 level.

After Covid, however, there was a reversal of the trend: from 2022 to 2024, primary spending fell by 1.4 percentage points (from 56.5% to 55.1%), but revenue fell by 2.3 points (from 53.7% to 51.4%). The recent deterioration in the primary deficit, from 2.9% in 2022 to 3.7% in 2024, is therefore entirely due to lower revenue.

The ratio of public spending to GDP is very high (57% in 2023, compared to a Eurozone average of 50%) and is among the highest in the world. [10] Spending is mainly composed of pensions (13.1% of GDP in 2023 against a Eurozone average of 11%), other forms of social protection and healthcare. French spending exceeds the Eurozone average in almost all categories (Fig.8).

The forecasts

The IMF's annual report, published in July, contains forecasts for the debt-to-GDP ratio, i.e. with unchanged policies. [11] The debt, at 113% in 2024, would reach 116.5% at the end of this year, would exceed 120% already in 2027, and would reach 128% in 2030 (Fig. 9). This is a rapidly increasing dynamic, despite assuming a reduction in the primary deficit from 3.4% in 2025 and 2026 to 3% in 2029 and gradually decreasing to 1.2% at the end of the period. The snowball effect, although worsening, would remain negative (slowing down the increase in the ratio) until 2030, and then become slightly positive (Fig. 10); The deterioration is explained by the higher effective interest rate on debt, due both to the increase in debt and to the rise in interest expenditure, which from 2% today would exceed 3% in 2029 and would further grow to 4.4% in 2034.

In 2034, France's debt-to-GDP ratio would therefore reach 135%, just below the 138% forecast (again with unchanged policies) for Italy in that year. The IMF predicts that, from the current 135%, Italy's debt will rise to 138% next year and remain around that value in the following years (Fig. 8). Unlike the French case, the forecasts assume an average primary surplus of 1.6% of GDP over the next ten years. The increase in debt-to-GDP over the next two years is primarily due to the stock-flow adjustment, which will reflect the cash impact of the 110% Superbonus, while in the following years, the failure to decrease debt despite fiscal efforts is due to an unfavorable IG difference.

Returning to France, to bring the debt trajectory back under control, the IMF recommends action on the spending side, which should be reduced, compared to the current legislation scenario, by one percentage point of GDP in 2026, by two percentage points from 2027, and further in subsequent years, reaching 53.7% in 2030. Spending savings should focus on welfare, introducing co-payments for non-essential services and removing specific pension benefits still enjoyed by some categories; furthermore, the size of the bureaucratic apparatus should be reduced, and some local government functions should be centralized. Thanks also to a slight increase in revenue through the removal of some tax breaks and special regimes, the primary deficit should fall below 3% as early as 2026 and turn into a surplus by 2029. The debt-to-GDP ratio, which peaked at 119% in 2027, would thus begin its decline (Fig. 11). Given the current difficulties, this scenario appears difficult to achieve.

[1] See "Bayrou, debt reduction is a vital urgency for France" , ANSA, 8 September 2025.

[2] Not surprisingly, the pandemic shock of March 2020 had a minimal impact on yields compared to other countries considered riskier, such as Greece, Italy and Spain.

[3] In Fig. 3, the rating agencies' ratings have been converted into numerical values ​​for better visualization, starting from a maximum (“AAA” for S&P and Fitch, “Aaa” for Moody's) of 105.

[4] For a brief comparison between the markets' and agencies' assessments, see our previous note "Rating agencies: how they assess Italy in the global context" , 16 July 2025.

[5] A motion of no confidence was moved against Barnier after his attempt to pass a budget law with 40 billion cuts without going through parliament, exploiting an article of the French Constitution. "The French government has fallen" , Il Post, 4 December 2024. The Bayrou government instead submitted the budget law to a vote of confidence, losing. See "The French government has fallen, again" , Il Post, 8 September 2025.

[6] For further information on the reasons behind the ratings, see the latest press releases on France from S&P , Fitch and Moody's .

[7] Monthly data suggest that revenues may exceed expectations in 2025 as well. See our previous note "State revenues are also performing better than expected in 2025" , 26 June 2025. For the reasons for the positive revenue performance in 2024, see our previous note "Tax revenue boom in 2024: why?" , 15 May 2025.

[8] Table 1 is constructed on the basis of the following breakdown of debt growth:

where dt is the debt-to-GDP ratio for year t, pd is the primary deficit in relation to GDP, SFA is the stock-flow adjustment (i.e., the difference between the change in debt and the deficit), also in relation to GDP. i is the average interest rate on public debt, obtained by dividing interest expenditure in year t by the debt stock at the end of the previous year, g is the growth rate of nominal GDP, and ? indicates the change compared to the previous year. The central term is the so-called "snowball effect," which measures how much the ratio is impacted by factors not directly controlled by the government, namely the interest rate on debt and the economic growth rate.

[9] To be more precise, primary surpluses were recorded only in 2000 and 2001 (1.6% on average). In the following years the budget was always in slight primary deficit (0.5% on average in 2002-2007).

[10] In 2023 it was ranked behind only several microstates and Ukraine, which is at war. See the IMF website .

[11] See IMF, Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for France , 14 July 2025.