France faces $4 trillion debt test as Tuesday vote looms

French bond yields hit 24-year highs this week as investors bet the National Assembly will reject a deficit-cutting budget on Tuesday, pushing the world’s seventh-largest economy closer to seeking emergency financial assistance.

Prime Minister Sébastien Lecornu proposed trimming the deficit from 5.4% to 5% of GDP in 2027. Public debt stands at a record $4 trillion, or 119% of GDP — the highest ratio since the immediate aftermath of World War II. If parliament blocks the measure, borrowing costs could spiral past levels last seen during the 2011 eurozone debt crisis, according to Eurasia Group managing director for Europe Mujtaba Rahman.

Rioting erupted in several cities Saturday. Luxury boutiques and supermarkets were looted. Public buildings burned. The violence followed mass student demonstrations earlier this month targeting deteriorating classrooms, missing teachers and schools unequipped for rising temperatures.

Nobel laureate Paul Krugman wrote in a Substack post last week that France effectively subsidizes older citizens at the expense of younger ones. Education spending tops the European Union average, but more than a quarter of that money pays pensions for retired teachers, according to Rahman.

President Emmanuel Macron pulled back from reforms meant to rein in the debt after the pandemic and the Ukraine and Iran wars worsened the fiscal picture. Markets are now pricing in growing odds of a default, driven by political paralysis rather than pure economics.

Far-right leader Marine Le Pen vowed to roll back the official retirement age to 62 and previously suggested dropping it to 60. Far-left presidential candidate Jean-Luc Mélenchon is campaigning on a plan to have the central bank cancel its holdings of French debt. Both lead polling ahead of the May presidential election.

Thierry Wizman, global FX and rates strategist at Macquarie Group, argued in a note Tuesday that the European Central Bank would not intervene quickly for fear of encouraging moral hazard. Existing bailout mechanisms lack the firepower for an economy of France’s size.

A legislative election in June may fail to produce a parliamentary majority for whoever wins the presidency in May. France could avoid immediate catastrophe this week only if Le Pen orders her allies in the Assembly to abstain, allowing the budget to pass.

Wizman outlined a sequence of events required before Paris commits to austerity: a no-confidence vote leaving the country without Assembly governance, a Moody’s credit downgrade, widening street violence, a contagious spike in the bond yield spread, and potentially Le Pen’s election. “Only after all that transformational pain of the next few months may France find its spine,” he wrote.