Goldman Sachs: French Debt - FJElite

The trajectory of France’s public debt is looking increasingly challenging, given the lack of progress in reducing the deficit and the recent increase in borrowing costs. We now estimate that France will eventually need to run a 1% primary surplus to stabilise its public debt-to-GDP ratio, a feat rarely achieved in recent history. As a result, we are revising our forecast for public debt to reach 125% of GDP by the start of the next decade (vs. 123% before).

The longer public debt remains high and increasing, the more likely it is France will face durably higher borrowing costs. This could lead to self-reinforcing pressures where higher debt entails higher rates, lower growth, and ultimately, even higher debt.

At the same time, we have noticed some more encouraging signs in the French fiscal debate. Recent polls suggest that economic and fiscal issues have risen to the top of voters’ concerns, with a large majority in favour of reducing public debt, the deficit and spending. Moreover, both Marine Le Pen and Edouard Philippe—whom polls see as the favourites to become President—have started making the case for reforming France’s fiscal framework.

The other factors we are watching in the run-up to next year’s elections include Jean-Luc Mélenchon’s performance in second-round polls (given he has long downplayed fiscal concerns), Marine Le Pen’s odds of winning a majority in Parliament (which polls suggest currently stand at 60% if she is elected President), and information regarding Rassemblement National’s economic policy plans.