Not Japan or the US: France risks becoming the next debt crisis

For years, sovereign debt crises seemed confined to emerging markets or the euro-area periphery. That comfort has gone. Government bond yields – the interest rates investors demand to lend to the state – are rising across advanced economies with high debt and little appetite for fiscal consolidation. But while several major economies are now pushing past fiscal guardrails, when asked where an acute crisis is most likely to strike next, one country stands out. France. It isn't simply a question of debt ratios. Who buys the bonds, the currency of issue, whether a central bank can step in and the political capacity to respond all shape that risk. To see why the highest debt ratio need not pose the greatest immediate danger there is no better case study than Japan. Gross debt exceeds 200% of GDP but the state also holds substantial financial assets, bringing net public debt to around 137% of GDP. Japan borrows in yen, is a major external creditor and holds most government debt at home – its central bank owns a very large share. The adjustment that lies ahead will still be difficult. As the Bank of Japan raises rates and scales back bond purchases, private investors must absorb more debt and the interest bill will rise. But Japan has more room than the headline ratio suggests. The greater risk is that its adjustment spreads through global interest rates. That eventuality became visible on 31 July when the United States helped Japan buy yen. Japan is the largest foreign holder of Treasuries, with around $1.1 trillion. Large Japanese sales of US public debt to stabilise the yen would push Treasury prices down and US yields up, raising Washington's borrowing costs. Which explains why the New York Fed joined the intervention by buying yen with euros rather than dollars. The episode showed how a Japanese currency problem could quickly become a US bond-market problem. The US presents another slow-moving danger. Federal debt exceeds $40 trillion – equivalent to around 124% of GDP. But that includes money one arm of government owes another. The debt that markets finance is debt held by the public: around $32 trillion, equivalent to 101% of GDP. The US trajectory matters more than today's public debt level. Under current law, the Congressional Budget Office expects debt held by the public to reach 120% of GDP by 2036, with deficits averaging 6.1% from 2027 to 2036. All three major rating agencies have removed their top rating, but Washington still lacks a credible medium-term plan. Washington appears concerned. After the 30-year yield reached 5.3% in August – its highest since 2007 – the Treasury announced it would at least double purchases of its own long-term bonds. Greater reliance on cheaper short-term borrowing would reduce costs now but increase refinancing risk: one-third of its market debt already falls due within a year. But in the short term, a sudden US funding crisis remains unlikely. The country borrows in dollars and Treasuries are the world's benchmark safe asset. Fiscal deterioration is more likely to appear first in higher yields, inflation or pressure on the dollar. However, any genuine rupture in confidence would shake the global economy. Why France's political crisis isn't (yet) an economic one France, many claim, is on the brink of economic collapse. Just ask its own government.… 5 minutes But the clearest warning can be found in France. Its public debt – about 116% of GDP – is lower than Japan's or America's, but the direction of travel and the institutional set-up make it the most fragile case in the short run. The deficit was 5.1% of GDP in 2025 and the government's own target for 2026 is 5%, with the return below 3% pushed back to 2030. Interest payments grew by double digits in both 2024 and 2025, and cost €34.5 billion in the first half of 2026 alone. They are on course to become the largest item in the state budget before the end of the decade. Meanwhile a hung parliament has toppled two prime ministers over the budget, the 2027 budget bill lands in October, and the presidential election follows in April. Consequently, the old euro-area distinction between core and periphery has blurred: French ten-year bond yields already trade above those of Greece, Spain and Portugal. And unlike Japan and the US, France borrows in a currency that it cannot issue or ultimately control. The ECB can backstop sovereign markets but its Transmission Protection Instrument is designed to counter unwarranted, disorderly market dynamics. Its activation is discretionary and eligibility is assessed against criteria including fiscal sustainability and compliance with the EU fiscal framework. France is also the euro area's second-largest economy, making stress difficult to contain nationally. Paris and Brussels must therefore act before markets impose adjustment on France on far harsher terms. A credible consolidation plan cannot wait for calmer politics. France still has time to prevent the next debt crisis but if it keeps waiting, markets may move first. The whole euro area would pay the price. Judith Arnal is a Spanish economist and lawyer. She is a senior research fellow at CEPS, Elcano Royal Institute, and Fedea. She worked for more than 10 years at the Spanish Treasury, heading the financial analysis department.