To what extent do France's current fiscal and macro-financial fundamentals indicate a vulnerability to a sovereign debt crisis over the next two years?

Details

Supervisors

Candelon, Bertrand

Faculty

Louvain School of Management

Degree label

Master [120] : ingénieur de gestion, à finalité spécialisée

Abstract

enThis thesis examines the extent to which France’s current fiscal and macro-financial fundamentals indicate a vulnerability to a sovereign debt crisis over the next two years. The analysis is motivated by the progressive deterioration of French public finances, characterized by persistently high public debt, structural fiscal deficits, rising interest expenditures and tighter financial conditions following the post-pandemic inflationary shock. The study develops a theoretical framework centered on debt sustainability, fiscal space, rollover risk, self-fulfilling crises and the institutional specificities of the Eurozone. It then builds an empirical early-warning system based on an annual panel dataset covering the 27 European Union member states over the 21st century. Due to the limited number of official sovereign default episodes within the EU, sovereign stress is measured through a market-based indicator constructed from sovereign bond spreads relative to Germany using a Value-at-Risk methodology. Several pooled logit and conditional logit specifications are estimated in order to identify the main determinants of sovereign stress. The results show that sovereign stress probabilities are primarily explained by high public debt, inflationary pressures, deteriorating current account dynamics and weaker political stability. Dynamic specifications incorporating lagged variables significantly improve predictive performance, highlighting the persistence of sovereign stress dynamics. The forecasting exercise conducted for France under different macro-fiscal scenarios suggests that sovereign vulnerability has increased significantly compared to pre-2008 levels. Under official forecasting assumptions, France appears exposed to moderate but manageable sovereign stress risks. However, adverse macroeconomic and fiscal scenarios generate substantially higher predicted stress probabilities, reflecting the growing sensitivity of French public finances to tighter financing conditions and deteriorating investor confidence. The thesis concludes that France does not currently face an imminent sovereign debt crisis, but that its fiscal and macro-financial trajectory has progressively reduced its margin of fiscal safety. While important structural stabilizers, including the role of the European Central Bank and the depth of French sovereign bond markets, continue to mitigate immediate crisis risks, maintaining fiscal credibility and restoring fiscal space remain essential to limit future sovereign stress vulnerabilities.