France is in crisis but bond markets leave other governments at risk of meltdown too

Sébastien Lecornu’s abrupt resignation as the French prime minister on Monday after less than a month in the role marked the latest clash between France’s stretched public finances and its polarised politics.

Lecornu was the latest prime minister to try and fail to cobble together a package of spending cuts and tax rises that would pass muster in a parliament without a clear majority, and contain mounting bond market pressures.

Emmanuel Macron is left with the choice of appointing yet another premier to try their luck with the political maths – or resigning himself. Not surprisingly, markets were rattled by the news on Monday.

France’s travails are particularly acute, but the president is far from alone in 2025 in trying to grapple with a mismatch between overstretched public finances and a weary electorate with little appetite for budget cuts.

Government bond yields, essentially the interest rate on a country’s debt, have been creeping up in many major economies in recent weeks and months, amid concerns about tax and spending pressures.

Yields on longer-term Japanese debt jumped on Monday, with the likely new prime minister, Sanae Takaichi, expected to ramp up spending – despite Tokyo’s 250% of gross domestic product (GDP) debt pile – amid consumer frustration over rising prices.

In the UK the putative Labour leadership contender Andy Burnham was ridiculed by colleagues last week for suggesting the government should be less “in hock” to the bond markets, when the Treasury is paying £110bn a year in interest to investors, and yields have repeatedly shifted in response to policy moves – as well as global pressures.

Rachel Reeves has repeatedly insisted her fiscal rules, which frustrate some Labour colleagues, are just the consequence of the need to maintain the confidence of the bond markets. In contrast with the French situation, the UK has a stable government with the levers to resolve its fiscal problems – by raising taxes, in the first instance. However, the recent example of Liz Truss, who lasted barely longer than Lecornu in power, is a constant reminder of the risks of throwing caution to the wind.

In the US, meanwhile, the market for treasuries – US government bonds – has been more quiescent despite Donald Trump’s massive tax cuts, forecast to add up to $2tn (£1.5tn) to public debt. Ten-year yields climbed to 4.6% in May as anxiety over the president’s tariff plans peaked, but for the moment those concerns have been more than outweighed by the promise of more Federal Reserve rate cuts and the hype around the AI investment boom.

However, analysts believe the budget pressures in the US are likely to become more acute in the months and years ahead, with the White House offering no plan to tackle the deficit, which was 6% of GDP last year even before the tax cuts. “It looks to me like an accident waiting to happen,” said Russell Jones of the consultancy Independent Economics. “It’s not a sustainable situation.”

Each country’s domestic political challenges are different but there is a broader picture here. Many governments ran up significant debts during the global financial crisis, and again through the Covid pandemic.

These remained manageable during the extended period of low interest rates that followed the crash. But post-pandemic, central banks began raising rates to battle the rise in inflation as global industry reopened after the Covid shutdown, and then the fresh increase in prices that followed Russia’s invasion of Ukraine.

That has left governments wrestling with higher borrowing costs, while many economies – and voters – are still arguably bearing the long-term scars of the financial crisis. That means politicians struggle to get buy-in for cuts. “There’s a sense from the public that we’ve endured some tough times already,” said Neil Shearing, the group chief economist at the consultancy Capital Economics.

In its global debt report, published earlier this year, the Paris-based Organisation for Economic Co-operation and Development said interest costs as a share of GDP among member countries had jumped from the lowest level in 20 years to the highest, between 2021 and 2024.

“Governments and companies borrowed $25tn globally from markets in 2024, nearly triple the amount in 2007,” the OECD’s economists said. “This increase is largely the legacy of the 2008 global financial crisis and the Covid-19 pandemic, in response to which large fiscal support packages, mainly funded via debt markets, helped avoid deeper recessions.”

At the same time, many governments face upward pressures on long-term spending, including ageing societies, the transition to net zero – and in the case of European nations, the need to ramp up defence as the US leans away from Nato.

All of these sovereign borrowers are fishing in the same pool of international investors, and concerns about sustainability in one major economy can spill over into others – as seen when UK yields tracked US borrowing costs upwards earlier in the year, for example, intensifying the pressure on Reeves, who responded with plans for spending cuts.

France’s crisis is likely to continue to be the focus for the moment, as Macron weighs up his next steps. But the global borrowing glut has left many governments vulnerable to even minor shifts in yields – and every bout of market jitters exacts a heavy political price.