France’s structural budget woes, political instability and limited appetite for reform were already well known last year, but until a few months ago they were only a side issue on international financial markets. That has changed fundamentally in recent weeks.

The yield premium the French state must pay on its bonds over German Bunds has surged to a record high. And bank economists and market analysts are publishing almost daily studies speculating whether the problems in the EU’s second-largest economy could develop into a new euro crisis.

Yields on 30-year government bonds are at multi-year highs – with the exception of Switzerland. (Chart: I-CV)

How complicated the situation has become was evident on 6 October. Marine Le Pen, the presumed presidential candidate of the Rassemblement National for the 2027 elections, presented plans for significantly reducing government spending – and promptly triggered a small relief rally in French government bonds. Yet the right-wing populist politician has in fact long been regarded in the EU as the bogeyman par excellence.

Guidance, more on the medium-term development of sovereign credit quality than on daily market developments, is provided by the latest country study from Zurich-based Independent Credit View (I-CV), a company active in credit assessment and advisory services. I-CV has been carrying out this annual analysis since 2009. The study is generally accessible only to clients and was made available to finews.

Competition for Capital is Back in Play

Already in the last 2025 edition, the credit experts noted that the markets, “after years of cheap money and excessive deficit spending by many governments,” had once again taken on their actually intended disciplinary function. The events of this year have strikingly shown that this observation was spot on.

“The market has awakened again; credit risks are being priced again,” the current edition says. The long end of the yield curve is once again reacting more strongly to fundamentals. Term premia have risen, competition for capital is increasing, and the market is once again taking fiscal credibility into account.

Fiscal and Future Index

For assessing sovereign creditworthiness, I-CV uses a concept in which structural forces affect sovereign credit quality through three channels: economic growth potential, spending pressure and financing. I-CV works with two indices.

The first is the fiscal index, which incorporates the debt level, fiscal position, interest burden, refinancing profile and economic momentum. The second is the future index, which takes into account indicators such as gross fixed capital formation, research and education spending, employment, productivity growth and innovative capacity. It is intended to indicate how the growth potential of an economy will develop in future, and which states will secure the foundations of future prosperity or live off their economic substance.

In the fiscal index, Switzerland, Sweden and Korea are in the top group. At the other end of the spectrum are, for example, the US, France and Belgium, as well as China. Here, I-CV diagnoses a high need for adjustment, as rising debt servicing crowds out budget items relevant to growth.

In the future index rankings, Switzerland and Sweden also belong to the top group. The US also ranks among the top five. On the other side are Mexico, Italy and Romania.

The two indices can also be combined in a graphic (see below).

“Dreamers,” “high flyers,” “sleepers,” “troublemakers” and “balancers”: the fiscal and future index analysis lays it all bare. (Chart: I-CV)

The I-CV country study 2026 covers 48 states. Switzerland is awarded the top rating of triple-A, with “stable fundamentals” (expectation regarding the future development of credit metrics). Germany, unlike with the major agencies, is no longer entirely spotless at I-CV (AA+, declining), the US comes in at AA– and France at A (declining). Belgium (A+), Finland (AA) and Slovakia (A–), all with weakening fundamentals, are considered vulnerable and worth keeping on the radar.

The study’s main general findings are:

• Definitive end of the fiscal honeymoon: Higher financing costs are meeting historically high debt levels, persistent primary deficits and new structural spending (for example, on defence). What matters now is no longer just how indebted a state is, but who can still afford its debt.
• Economic growth as the most elegant way out of the debt problem: Yet ageing societies reduce the supply of labour and weigh on potential growth. Productivity, investment and technology are therefore becoming the key to debt sustainability. Can policymakers close the gap through higher primary surpluses if nominal growth remains below financing costs?
• From a credit perspective, not all debt is equally problematic: Debt financing infrastructure, technology, education or energy supply can increase future production potential. By contrast, consumption, transfers and persistently rising current spending burden the balance sheet without generating future returns.
• Key factor: fiscal room for manoeuvre: Some states still have enough capacity, despite new burdens, to invest in the future and absorb shocks. Others are being hamstrung by interest costs, demographics, defence spending and existing deficits. The ways out – austerity programmes, higher taxes, inflation and financial repression, or central bank support – distribute the bill differently, but do not eliminate it. A restructuring involving debt relief also comes at a cost, not only for investors. 
• Rating changes begin long before a downgrade by the major agencies. Differences between states are widening. The decisive factor is the combination of fiscal room for manoeuvre and future viability. States with buffers and productive investments can absorb new burdens. By contrast, those combining weak growth, rising interest burdens, rigid spending and sluggish policymaking risk their own credit quality.

Defence (spending in billions of dollars) is an area where structural additional spending arises. (Chart: I-CV)

France is also prominently mentioned in the country study. For the country’s debt path, the further course of economic growth is decisive. “France has little margin for error,” warns I-CV. Without higher potential growth, even stabilising the debt ratio will be difficult. However, interest rates, growth and deficits are currently heading in the wrong direction.

René Hermann, lead author of the study and senior partner at I-CV, points out that France has long been rated only single-A by I-CV. “The three major international rating agencies tend to react somewhat cautiously to countries, but once a downgrade cycle has been set in motion, things can suddenly move very quickly.”

At present, Hermann sees no reason to revise his comparatively low rating for France. “The credit profile has deteriorated further; the room for manoeuvre is shrinking. But the country has a broadly diversified economic base, strong institutions, a stable financial sector and, thanks to nuclear power, relatively high autonomy in electricity supply,” he notes. The decisive factor for further rating developments will be whether a government of any political colour can in future convincingly communicate to the population the need for cuts and build the necessary acceptance for them. On that front, scepticism remains warranted.