Why Vanguard Calls France a “Degrading Credit” — and What It Means for Bond Costs

Vanguard’s description of France as a “long-term degrading credit” is a warning about its fiscal direction, not a formal sovereign credit rating. Persistent deficits, rising debt and political difficulty agreeing on budget measures are weighing on investor confidence. By September 29, French 10-year borrowing costs had risen to 4.75%, compared with 3.63% for Germany’s, as investors demanded a larger premium to hold French debt.57

What the wider French-German spread signals

The yield gap between French and German 10-year bonds—the spread—is one measure of the extra return investors demand to hold French debt rather than German debt. It widened from about 85 basis points at the start of September to more than 110 basis points on September 29, its widest level since the 2012 eurozone crisis, according to Deutsche Bank.

A higher yield means the government faces more expensive borrowing when it issues new debt and refinances maturing bonds. That adds pressure to future budgets, particularly if higher interest costs persist.20

The spread does not, on its own, prove that France will lose access to bond markets or that a crisis is inevitable. It reflects investors’ changing assessment of risk and can move with broader market conditions as well as France-specific concerns.17

Deficits and debt keep the pressure on

Fitch expects France’s budget deficit to remain high: 5.2% of GDP in 2026, 5.5% in 2027 and 5.2% in 2028. The agency cited weaker growth, higher interest expenditure and additional defence commitments as factors behind its higher projections.20

Fitch also projects government debt rising from 115.7% of GDP in 2025 to 122.7% by 2028. Those forecasts point to a difficult debt-stabilisation path: if deficits remain large and borrowing costs rise, the government has less room in its budget to manage the debt burden.20

Rating decisions are separate from Vanguard’s warning

Vanguard’s phrase is an investor’s assessment of France’s longer-term credit trajectory; it is not an official rating change. Rating agencies make those decisions separately. Scope downgraded France to A+ from AA- and set a stable outlook, while Fitch separately affirmed France at A+ with a stable outlook.20

The two agencies’ actions show why market pricing and formal ratings should not be conflated. Bond yields can rise as investors reassess risk, even when an agency has not made a new downgrade. Further rating changes remain a concern for investors, but they are not a foregone conclusion.1820

Political hurdles and foreign-investor exposure

France’s budget challenge is also political. The government faces a parliamentary fight over a roughly €54 billion fiscal effort aimed at reducing the deficit, while the 2027 presidential election adds uncertainty about future policy. Deutsche Bank notes that getting measures approved may be difficult.19

That uncertainty matters because investors are looking for credible plans to rein in deficits, not just targets. If the proposed measures fail to pass or do not convince markets, French borrowing costs could face further upward pressure. That is a risk scenario, not a reliable forecast of how far the spread will move.1718

France’s bond market is also described as unusually dependent on foreign investors. If overseas demand weakens, the government may need to offer higher yields to attract buyers, making refinancing more costly.6

What ECB support can—and cannot—do

European Central Bank action could help contain a wider, disorderly sell-off in eurozone bond markets, but support should not be treated as a guaranteed cap on France’s borrowing premium. Brookings discusses the possibility of ECB intervention if market stress worsens, while noting the difficulty of assuming that the central bank will act simply to close a country’s spread.1

Even if ECB action helped calm broader market turmoil, it would not resolve France’s underlying budget pressures or replace an achievable fiscal plan. The borrowing outlook therefore depends both on market conditions and on whether France can make credible progress on its deficits and debt.120