what are the dangers related to excessive debt? | EUROtoday

With the heated discussions on the 2025 price range within the National Assembly, the problem of public debt has come again into the highlight. Beyond its excessive degree (112% of GDP), the debt is worrying as a result of growing prices it generates for the State, compelled every year to repay a part of it, elevated by curiosity. According to Bercy forecasts, this “debt burden” ought to improve considerably within the coming years, from 46 billion euros – for a complete of three,230 billion – in 2024, to 75 billion in 2027.

“Public debt (…) displays an increasingly high cost which constrains all other expenditure, burdens the country’s investment capacity and dangerously exposes it in the event of a new macroeconomic shock”alerted the Court of Auditors in July. “If we don’t do anything, [les frais de remboursement de la dette] will become the first item of State expenditure”warned the Minister of the Economy and Finance, Antoine Armand, while presenting his finance bill. How did we get here, and should we be concerned?

How was France’s debt created?

The State goes into debt on a recurring basis to finance public operating and investment expenditure. He borrows, pays interest (“coupons”), repays at maturity and takes out new loans.

Historically, France has resorted to various debt modalities, for example by calling on the savings of the French, freely (the “Balladur mortgage” of 1993) or constrained (the “compelled mortgage” of Pierre Mauroy in 1983), or by requiring banks to buy its debt. But today, it mainly borrows on the financial markets.

It is the France Trésor Agency (AFT), located in the heart of Bercy, which is responsible for managing these operations. AFT warns investors that it will need financing. Each player says how much they are prepared to put in and, based on the offers, the AFT allocates lots at the most attractive rates for them.

What does the debt burden currently represent?

Each year, France must pay interest to its creditors on the debt it has borrowed: these costs, called “debt cost” or “debt service”, are considered one of the expenses of the budget of the state. With 54.9 billion euros of commitment authorizations in 2025, according to government projections, this charge should represent the fourth item of public expenditure, well ahead of the security or ecology budget, but behind the national education, defense or tax refunds to businesses and individuals (under tax loopholes or incentive schemes).

The budget devoted to repaying the State debt, which should represent around 1.8% of GDP in 2025, has increased significantly in recent years: in 2018, it still only represented 35.2 billion. And this trend is expected to further increase over the coming years: the debt burden could represent 75 billion euros in 2027, or 2.4% of GDP. Not to mention that this figure does not take into account the debt burden of local authorities and social security organizations, calculated separately.

What explains the increase in this charge?

The increase observed in recent years can be explained, on the one hand, by the surge in inflation, particularly marked during the 2022-2023 period. Indeed, the approximately 10% of State loans granted at variable rates are linked to inflation (French and European). When consumer prices soared, these loans followed: in 2022, these “indexation costs” amounted to 23 billion euros, or almost half of the interest paid over the year. In 2023, however, this amount decreased, reaching 8.9 billion euros.

The increase in the cost of French debt is also due to the general increase in interest rates in recent years. By raising its key rates to a level never before reached in 2023 to combat inflation, the European Central Bank has driven up all interest rates in the euro zone, for States as well as for individuals and businesses. . Although they then fell in 2024, they remain at a high level. Result: France borrows today at around 3% (for its ten-year fixed rate loans), compared to around 0% in 2021. This rate applies to the new debt it raises, but also to the renewal old debts.

Finally, more prosaically, the debt burden increases because… the debt increases. Over the last ten years, it has swelled by 1,000 billion, or 112% of French GDP. To make up for its deficit budgets, from year to year, the State has had to increase its borrowing. The interest to be repaid adds up, and further increases the debt, in a form of vicious circle.

As the Court of Auditors explained in April, these phenomena can be combined: thus “the very strong growth in the volume of State debt since 2008 markedly reinforces its sensitivity to rate movements”.

Is there a maximum level that should not be exceeded?

Ahead of the budgetary discussions, the Minister of Economy and Finance, Antoine Armand, expressed concern concerning the state of affairs, implying that France’s recourse to debt may someday now not be attainable: “If we can no longer finance ourselves on the markets, we will not be able to continue to prepare for the future with nuclear power and new technologies, and we will depend on others. » But when does debt become unsustainable, risking payment default?

There is no consensus on a threshold beyond which France would be unable to finance itself on the financial markets. The State’s access to debt depends above all on the markets’ confidence in its ability to repay it. This is influenced by several factors, including the opinions of rating agencies (notably Fitch, Standard & Poor’s, Moody’s) on the budgetary situation of States. Latest to date: the warning sent on October 25 to France by Moody’s, which is concerned that “deterioration” of public funds has “exceeds[é] [ses] expectations »without however lowering its rating immediately.

However, the less confidence the financial markets have, the higher the interest rates granted to States. In recent months, political uncertainties linked to the dissolution of the National Assembly and budgetary controversies have contributed to raising the rates at which France borrows, compared to its neighbors. On September 26, that of five-year loans symbolically slightly exceeded the Greek rate, and is also close to the Spanish rate.

Despite these “signals”, France just isn’t in danger within the quick time period. When the loans mature and it’s essential to take out new ones, the French State nonetheless manages to acquire enticing charges, as a result of lending it cash stays a secure funding. With every difficulty, the AFT locations its debt with out downside, together with this summer season within the absence of a majority within the Assembly. The euro, a typical forex, limits speculative assaults, and makes it attainable to profit from the assist of the ECB within the occasion of a market offensive.

Furthermore, France’s situation is not unique: in Western countries, public debt has continued to grow with the decline in growth and the liberalization of financial markets, offering States financing possibilities. generous. In absolute value, the United Kingdom’s debt has increased sixfold in twenty years. Furthermore, despite their slight recent drop, French rates remain for the moment within the European average, particularly in the long term and well below the records of the 1980s, for example.

How big is the financial risk?

The risk brandished by the government rests more on the ” value “ of this debt for public finances: in the future, can we spend “more money to repay our loans than for our schools, our security or our economic fabric”asked Antoine Armand? The large amount of interest owed by the State encourages governments to reduce the envelopes allocated to other public expenditure items, or to increase taxes. That of Michel Barnier sets a target of 60 billion euros in savings for 2025, an amount which is close to the 55 billion which will be absorbed next year by the payment of interest on the debt.

The right is also part of this line of” effort “ budgetary, advocating less taxes and more savings, when the left denounces an austerity plan ” violent “, which could hamper growth and limit state revenue, thus increasing the deficit: “I think that this will produce an economic recession and that this is really not the right way to tackle the problem of increasing public deficits”had estimated Manuel Bompard, the coordinator of La France insoumise, in October. For part of the ranks on the left, alternative solutions exist, such as the cancellation of public debts – inducing many other types of risks.