Will France Default?

If France can’t pay its debts, what happens to everything else you own?

France now pays more to borrow than Italy, Spain or Greece. Its 10-year yield was about 4.85% on Friday, against 4.54% for Italy, 4.40% for Greece and 4.07% for Spain. Last week it briefly topped 5%, the highest in more than two decades.

Most investors can’t picture a rich country failing to pay its debts. So let’s picture it: a France that can’t pay. Then let’s see how likely that really is.

Start With The Size

France owes about €3.6 trillion, roughly $4 trillion. That is a quarter of all government debt in the euro zone. It is about ten times what Greece owed in 2011.

Remember 2011? A crisis that began in a country with one-tenth of France’s debt did this between May 2 and October 3 of that year:

• Euro-zone blue chips (FEZ): down 36%
• French stocks (EWQ): down 36%
• European banks (EUFN): down 39%, and down 43% by June 2012
• Italian stocks (EWI): down 41%, and down 48% by June 2012
• S&P 500 (SPY), also hit by the US credit downgrade that August: down 18.5%
• Long US Treasuries (TLT): up 34%
• The euro against the dollar, from its May 2011 peak to its July 2012 low: down 19%

Fund figures are total returns, with dividends included. Ten-year yields peaked at 29% in Greece, 14% in Portugal, 12% in Ireland, 7.1% in Italy and 6.8% in Spain (monthly averages).

That was the small version. Greece was small enough to rescue. France is ten times the size. (For how the big sell-offs of the past century compare, see Market Crashes Compared.)

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How A French Default Would Unfold

None of this is a forecast. It is the worst case, step by step, with each step’s size taken from something that has already happened.

1. The budget stalls. France’s deficit was 5.8% of GDP in 2024 and 5.1% in 2025. The government now expects 5.4% this year. S&P and Fitch have both cut France to A+. This part is already underway.
2. Yields climb to 7%, Italy’s 2011 peak. That is about two points above today. The bill would not arrive overnight. France’s debt has an average maturity of about eight and a half years, so only a slice is refinanced each year. France’s debt office estimates that each extra point of interest costs the state about €3 billion in the first year and more than €33 billion a year by the ninth. If 7% lasted long enough for all the debt to reprice, interest would take about a sixth of the government’s revenue, up from about a twentieth today.
3. The backstop has conditions. The European Central Bank can buy a country’s bonds to calm a panic. Its rules expect that country to be following the European Union’s budget rules. The ECB has room to interpret those rules, but a France that openly refuses to cut would test how much.
4. Restructuring. Greece’s 2012 deal, the largest sovereign restructuring in history, cut the face value of its privately held bonds by 53.5% and wiped out about €107 billion. Apply the same cut to all of France’s debt and lenders lose about €1.8 trillion, or $2 trillion. That is roughly 17 times the Greek loss. Treat it as the upper bound: Greece’s cut spared official lenders such as the ECB.
5. The ripple. More than half of the French state’s bonds are held abroad. European banks fell 39% when the trouble was in Greece. This time the hole would be in the euro zone’s second-largest economy, and the question would become whether the euro survives.

How Bad Could It Get?

Use 2011 as the floor, not the ceiling. There is no precedent for a default at the core of the euro. A default ten times the size of Greece’s problem plausibly means:

• Euro-zone stocks: down 40% or more. They fell 36% in 2011.
• European banks: down 45% or more. They fell 39% to 43% in the Greek crisis.
• The euro: $0.91 or lower. That is where a repeat of the 19% fall would take it from $1.12 today.
• The S&P 500: down about 20%, roughly its 2011 fall, as money runs to the dollar and other havens.

And you thought 2011 was bad.

Why It Probably Won’t Happen

Here’s the other half. France’s real problem isn’t the size of its debt. It’s that the debt is growing faster than the economy that carries it.

Think of a household that earns $100,000, spends $105,400 and owes $119,000. Its debt grows by $5,400 a year. Its income grows by about $2,500. To stop the debt from outrunning the income, it can borrow about $3,000 a year, so it has to cut its yearly borrowing by about $2,400. Scale that up to France and it is about €70 billion a year (about $80 billion), or roughly 2.4% of GDP. We walk through that household step by step in French Debt Problem: 3 Lines Of Math.

That’s hard. It’s not impossible. We went through IMF data for 24 rich countries from 1985 to 2019 and found 46 episodes where a country ran a deficit of 4% of GDP or more with debt above 60% of GDP. Here’s how they ended:

• 61% fixed it. They cut the deficit by three points or more within five years. Sweden in 1993, Italy in 1994, Belgium, the Netherlands and Spain are examples.
• 13% were rescued. They needed emergency loans. Iceland in 2008, Ireland in 2010, Portugal in 2011 and Spain’s banks in 2012 are among them.
• 2% defaulted. That is one episode: Greece in 2012.

The rest, about a quarter, drifted: no big cut and no crisis. Source: IMF World Economic Outlook data; Trefis analysis.

France has cut deficits this large before. Its deficit fell from 6.4% of GDP in 1993 to 1.3% by 2000, and from 7.4% in 2009 to 2.3% by 2018. Neither episode ended in a crisis. But neither was quick. The second took nine years, and France’s debt was lower both times.

To be fair to the worriers: some of the fast fixers of the 1990s, Sweden and Italy among them, could devalue their currencies. France can’t. And its borrowing costs are rising, not falling. That’s why the fix has to come from the budget, and why a yield near 5% matters.

The Verdict

A French default is roughly a 1-in-50 kind of outcome. Plan for it anyway.

History says rich countries in France’s position fix the problem about six times in ten. The catastrophe needs France to refuse the cuts and lose the ECB’s help at the same time. Watch two things. The first is France’s 10-year yield, now about 4.85%, against its growth rate including inflation, about 2.5%. The second is whether parliament passes a budget that shrinks the deficit. The 2027 budget now in front of it aims for 5.0%. If both go the wrong way, the tail risk grows.

What It Means For Your Money

1. Know what you own in Europe. European bank stocks and euro-zone funds took the worst of 2011. Our dashboard How Low Can Stocks Go During A Market Crash shows how far key stocks fell in past sell-offs, and how long they took to come back.
2. The safe havens worked in 2011. Long Treasuries (TLT) returned 34% and the dollar index rose about 9% while euro-zone stocks lost 36%.
3. The US has a version of the same problem. The IMF expects a US deficit of about 7.5% of GDP this year, with debt rising from 124% of GDP in 2025 to 129% in 2027. The difference is that the US borrows in a currency it can print, so its risk is inflation, not default.

How Would Your Portfolio Handle A Tail Event?

A tail event doesn’t announce itself, and the time to look at a portfolio is before the yields move, not after. The question worth asking is how much you would lose if something this unlikely happened, and whether you could live with it. Our Boston-based partner firm, an SEC-registered investment adviser, offers a free portfolio review for investors.

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