Which is a Riskier Bet for Sovereign Debt: The UK or France?

In 2025, the European debt crisis narrative has shifted from the periphery to the core. While Italy and Greece remain under scrutiny, the UK and France—two of Europe's largest economies—are now at the center of a new wave of sovereign risk. Political instability, fiscal fragility, and eroding market confidence are converging to create a precarious environment for investors. But which country poses the greater risk?

Political Instability: A Double-Edged Sword

France's government is teetering on the brink of collapse. Prime Minister François Bayrou's minority administration faces a confidence vote on September 8, 2025, after a coalition of left-wing and far-right parties united to oppose his austerity measures. The proposed €44 billion budget cuts—targeting public holidays, pensions, and welfare—have sparked public unrest and political gridlock. Analysts warn that a government collapse could trigger snap elections, further delaying fiscal reforms and deepening uncertainty.

The UK, meanwhile, has avoided immediate political turmoil but is not immune to instability. The 2025 Financial Stability Report (FSR) by the Financial Policy Committee (FPC) highlights risks from global geopolitical tensions and trade fragmentation, particularly U.S. tariffs announced in April 2025. While the UK's government remains intact, the FPC notes that prolonged uncertainty could destabilize core bond and repo markets, especially under prolonged stress.

Fiscal Sustainability: A Tale of Two Debt Trajectories

France's debt-to-GDP ratio is projected to rise from 113.2% in 2024 to 120% by 2030, despite Bayrou's austerity plan. The primary deficit remains at 5.8% of GDP, far above the UK's 2.3%. Structural challenges—aging demographics, rising defense spending, and climate costs—compound the problem. Goldman Sachs analysts argue that without a compromise with the Socialists, France's deficit could rebound, triggering higher borrowing costs and a potential credit rating downgrade.

The UK's fiscal outlook is no less dire. The Office for Budget Responsibility (OBR) reports a public deficit of 5.3% of GDP in 2024–25, with debt-to-GDP expected to reach 108% by 2028. While the government has introduced fiscal rules to stabilize public finances, the OBR warns of a “pro-cyclical” approach that could stifle growth. The UK's reliance on short-term debt issuance and its exposure to U.S. market volatility further amplify risks.

Market Confidence: A Shifting Tipping Point

Market confidence in both countries has eroded, but the dynamics differ. France's political instability has already triggered a selloff in equities and bonds. The CAC 40 index dropped nearly 2% in a single session, while French banks like BNP Paribas and Société Générale fell over 6%. The yield spread between French and German 10-year bonds has widened to its highest level since April 2025, signaling investor anxiety.

The UK's markets have shown more resilience, but not without cracks. The FPC notes that while the banking system remains well-capitalized, vulnerabilities in market-based finance—such as leverage and interconnectedness—could amplify shocks. The UK's CDS spreads have stabilized slightly due to the government's fiscal announcements, but concerns about growth and debt sustainability linger.

Investment Implications: Navigating the Risks

For investors, the key question is whether to hedge against one country or both. France's immediate political instability and higher debt burden make it the riskier bet in the short term. A government collapse could trigger a sharp rise in borrowing costs and a flight from French assets. However, the UK's long-term fiscal challenges—driven by demographic trends and structural underperformance—pose a more insidious threat.

Strategic Recommendations:
1. Short-Term Hedging: Consider shorting French government bonds or buying CDS protection on France's sovereign debt.
2. Long-Term Positioning: Allocate to UK infrastructure projects (e.g., energy and transport) to capitalize on the government's 10-year investment plan, but monitor fiscal rule adherence.
3. Diversification: Avoid overexposure to either market. Instead, balance European sovereign debt with higher-quality assets in Germany or the Netherlands.

Conclusion: A Delicate Balance

Both the UK and France are navigating treacherous fiscal waters, but their risks manifest differently. France's political fragility and higher debt burden make it the more immediate threat, while the UK's structural weaknesses could erode confidence over time. Investors must remain agile, hedging against short-term volatility while preparing for long-term fiscal headwinds. In a world where political and economic risks are increasingly intertwined, the next European debt crisis may not be a question of if, but when.