France’s debt crisis deepens; IMF bailout possible, says finance minister

France risks an IMF bailout as its government faces collapse, with a budget deficit at 5.4% of GDP. Photo / Getty Images

France risks seeking a bailout from the International Monetary Fund (IMF) as its Government teeters on the brink of collapse, its Finance Minister has warned.

French long-term borrowing costs hit their highest level since 2011 on Tuesday amid fears the second collapse of its Government within a year would leave it unable to tackle a budget deficit, which is on course to hit 5.4% of GDP this year.

Eric Lombard, the Finance Minister, admitted that asking the IMF to intervene “is a risk that is in front of us” as France struggles under the weight of its ballooning national debt.

France has never received a bailout from the IMF but the collapse of its Government would leave the country in a precarious position with a record national debt of $6.6 trillion (€3.3 trillion).

Lombard said: “It is a risk that we would like to avoid, and one that we should avoid, but I cannot tell you that this risk does not exist.”

Opposition parties lined up to say they would vote against Prime Minister Francois Bayrou after he attempted to break the political deadlock over his proposed deep budget cuts by calling for a confidence vote in his administration.

It comes after former Prime Minister Michel Barnier was ousted in a no-confidence vote in December for failing to gain support for steep reductions in public spending.

Bayrou now looks likely to lose the confidence vote announced for September 8 over his plans to cut the budget deficit by 1.5% of GDP next year.

Bonds under pressure

The turmoil sent the yield on 30-year French bonds – a proxy for the cost of long-term government borrowing – up three basis points to a 14-year high of 4.42%. France’s 10-year yield hit its highest level since March.

Rupert Harrison, of bond trader Pimco, said: “This is an ongoing political impasse, and the market’s not going to like that. We continue to think this is not going to be good for French borrowing costs.”

Mohit Kumar, chief European economist at Jefferies, said he expects “increased volatility and pressure” on French bonds in the coming days.

France’s mountainous debt pile currently eclipses the size of its entire economy, with the IMF’s latest forecasts suggesting it could hit 116.3% of GDP this year.

This is well ahead of the UK, where gross debt levels are projected to reach 103.9% of GDP.

The comments from France’s finance minister have been made just days after leading economists warned that the UK may be heading for a 1970s-style IMF bailout.

They warned Rachel Reeves’ handling of the economy risked a return to years of high inflation and borrowing, which culminated in a humiliating call for help from the world’s lender of last resort.

France still enjoys lower borrowing costs than the UK despite its higher debt levels and political deadlock, with yields on 10-year bonds hovering around 3.5% relative to the UK’s 4.8%.

Meanwhile, shares in French banks were the hardest hit by the recent turmoil as a result of their large holdings of French debt. BNP Paribas was down around 5% while rival Societe Generale shed more than 6%.

The Cac 40 stock index in Paris fell a further 1.2% on Tuesday, following a 1.6% decline on Monday.

Andrew Kenningham of Capital Economics said: “The French prime minister’s decision to call an early vote of confidence is most likely to trigger his replacement with yet another prime minister or [less likely] fresh legislative elections.

“Either way, France’s budget deficit will remain well above the level needed to stabilise the debt ratio.”

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