The recent increase in borrowing costs of major countries such as the US or Britain and, to a lesser extent, France, has brought the negative consequences of large budget deficits and high public debt back into the spotlight.

In the US and Britain, yields on 10-year government bonds in secondary markets, which shape their borrowing costs, approached 5% last week – in fact they reached 4.8% and 4.9%, respectively, up more than a percentage point since September.

Reports in international financial media refer to the punishment imposed by bond vigilantes – investors who rush to sell the debt of countries with lax fiscal management and then buy it at higher yields.

According to an analysis by Morgan Stanley, the surge in yields on US long-term bonds is partly due to investors’ expectations that the country’s economic growth and inflation will run at a higher rate than previously expected, which means that the central bank’s (Fed) “neutral” interest rate, which neither constrains nor boosts growth, will be correspondingly higher.

However, Morgan Stanley notes that the increase in yields also incorporates the premium that investors seek as compensation for the risk they take on by buying debt over a 10-year period. Morgan Stanley estimates that the extra “premium” investors are asking for has risen about 30 basis points in the last two months to 55 bps, up from zero for most of the last 15 years.

In Britain, yields are rising because investors believe the budget announced by Labour’s Chancellor of the Exchequer, Rachel Reeves, is over-optimistic in reducing the deficit despite significant increases in employer pension contributions. With the explosion in borrowing costs two years ago caused by then Prime Minister Liz Truss’s announcements of big tax cuts vivid in memory, it is understandable that there is concern in the government’s mind. It should be noted that interest rates close to 5% significantly increase debt service costs which put upward pressure on the deficit, thus risking a vicious cycle of debt growth if additional restrictive measures are not taken.

In the Eurozone, the increase in borrowing costs seen has been significantly smaller than in the US and the UK, with the biggest impact being on bonds in France, where the budget deficit has also been very high in recent years – estimated at close to 6% of GDP in 2024 – and government debt is on the rise, having exceeded 110% of GDP.

The political crisis triggered by last July’s early parliamentary elections, which resulted in a three-party parliament where no party or faction had a majority, obviously exacerbated the problem. Six months after the election, the new prime minister, François Bayrou, has still not been able to present a budget for 2025.

Despite an increase of about 60 basis points from January 2023, however, the yield on French 10-year bonds is much lower than its US and UK counterparts as it stood at 3.33% on Thursday. This has certainly been helped by the fact that investors expect eurozone inflation to fall back to the 2% target this year and the European Central Bank will make three or four interest rate cuts by June.

However, French securities yielded more than that of 10-year Greek government bonds, which stood at 3.30%, the same as it did about a year ago. At the same time, the yield on Greek securities remains lower than its Italian counterpart (3.65%), indicating that prudent fiscal management and primary surpluses, combined with higher growth relative to the eurozone and a recovery in investment grade, have restored the country’s fiscal credibility, resulting in it borrowing more cheaply than many major economies.

The huge success of the new 10-year Greek 10-year benchmark bond issue in the past week has confirmed this recovery in credibility as the issue has been a huge success, with record bids of over €40 billion and a simultaneous narrowing of the spread with German bonds.