What is the "snowball effect" of debt and what role does it play in the economic situation that fuels protests in France?

What is the "snowball effect" of debt and what role does it play in the economic situation that fuels protests in France? A social fire is sweeping the streets of France. What began as a student protest against the deterioration of conditions in public schools developed into a more heterogeneous one crying out against the cost of living, the lack of opportunities for young people, or the amount of pensions. The government of President Emmanuel Macron was overwhelmed and in some of the main cities of the country, curfews have been imposed to put an end to the looting and vandalism that had taken place in them since last weekend. But an even more destructive fire could be starting in the financial markets, where growing distrust in French bonds has been detected in recent weeks. France, like many other countries, issues these and other debt securities to finance its current expenses in exchange for offering investors a future return on investment. But since the beginning of September 2026, France's risk premium (the extra cost it must pay to investors to finance itself in the debt markets compared to Germany, considered the most solvent country in the Eurozone) has increased substantially, reflecting growing doubts about the sustainability of French debt. In other words, the markets are beginning to doubt whether the French Republic can cope with paying the principal and interest on its debt and end up in a "default" or suspension of payments, as happened, for example, to Argentina in 2001. For now, however, the French State continues to find financing. The Minister of Finance, Roland Lescure, assured the BBC at the beginning of this month that bond demand remains and that the government issues debt every two weeks without major problems, and the Governor of the Bank of France, Emmanuel Moulin, said two weeks ago that the country does not need the help of the European Central Bank (ECB) at the moment. Nevertheless, the Ministry of Economy and Finance admitted that it has reduced the sale of bonds with more than 30 years to the lower demand from investors. "Suddenly, the financial markets are treating France as the new economic sick of the Western world," wrote Nobel laureate in Economics Paul Krugman in a recent article. The Macron government is aware that it must address the problem and has been trying for some time to approve budgetary measures to reduce the public deficit (the difference between state spending and income) and to clean up the accounts, but it has encountered the rejection of a Parliament in which it is in the minority and of the protesters who demand better public services and reject cuts to the French "welfare state". And while it strives to restore order in the streets and regain the confidence of the markets, Macron is facing another threat: the "snowball effect" in the cost of debt, which can further reduce its room for maneuver. What is the "snowball effect" of debt With images of historic buildings on fire opening the news in all over the world, Minister Lescure said on Monday in the National Assembly that France is not trapped in a debt "snowball". It is a concept used in macroeconomics. A country's debt is measured in proportion to the size of its economy (GDP), and this proportion increases each year due to the interest that has to be paid on accumulated debt and decreases due to economic growth, also counting inflation (so-called nominal growth). If the average interest rate that the State pays for its entire debt exceeds nominal growth, there is a positive snowball effect and the debt grows by itself. It increases as a percentage of GDP even if the government does not spend more than it earns. If the opposite occurs, the effect is "negative" and the debt reduces by itself. The effect is greater the higher the starting debt, which makes France, with a debt of around 119% of GDP, especially sensitive. As explained to BBC Mundo by Jagjit S. Chadha, Professor of Economics at the University of Cambridge, "when you have a high level of debt, you have to pay a large amount of interest on that debt". "The danger is that if you reach the point of the snowball due to the increased risk perceived by investors, interest rates will rise, and if they do, the debt will take even more resources from the State". "If it is perceived that the State will not be able to pay its debt or that there will be problems in the future, interest rates will rise even more and an ever-increasing percentage of what the State earns from taxes will go to paying off the debt instead of public services". Is France already suffering the "snowball effect" in its debt? Hardly and for a short time. Between 2017 and 2025, with very low interest rates, the effect was negative (favorable) and the country was able to reduce debt by an average of 1.74 percentage points of GDP per year, according to Treasury data collected in a report presented in July to the Finance committee of the National Assembly. But the average interest rate that France pays for its debt has risen from 1.8% in 2023 to 2.3% forecast for 2026, with stagnant growth of 0.5%, according to the government's latest forecast. The government predicts that the effect will be positive in 2026, which would be the first time since 2020 that the debt would be growing by itself, although it would do so in a still marginal way. Lescure admitted to the parliamentary committee that the weight of interest again pushes the debt upwards, but denied that there is a lasting snowball effect that makes the debt grow inexorably. The risk is that the situation consolidates. The French Court of Auditors and the European Commission estimate that the average rate will grow durably towards the end of the decade. If this happens, France would need not only to reduce its alarming deficit but to achieve a primary surplus (more income than spending without counting interest) from which it is now very far. France seems to be moving ominously towards that scenario. Lescure assured last week that the debt burden would reach approximately 91 billion euros annually in 2027 (about US$102 billion), which exceeds the annual budget for education and defense. Why France? France is not the only advanced economy that has seen its debt grow in recent years. At the beginning of this decade, governments all over the world massively indebted themselves to sustain the economy amid the covid pandemic. In the case of European countries, this additional indebtedness was added to that caused by the sovereign debt crisis in the Eurozone that began in 2009, when gigantic capital injections were necessary to rescue Greece, Ireland, Portugal, and Cyprus, and to support the Spanish banking sector. The boom of artificial intelligence giants, which issue debt and compete with states in attracting capital, the rise in energy prices derived from the war between the United States and Israel against Iran, and the commitment of NATO countries to increase their defense spending have added even more tensions to public coffers. But experts point out that there are some aggravating factors in France. The country accumulates public debt that already exceeds 119% of its GDP and with an annual deficit of 5.1%, it is very difficult to reduce it. According to Chadha, "France's debt level is high by standards in times of peace, when we expect lower levels, so that the government can borrow if a problem arises". With an increasingly aging population, France has to spend more and more to pay pensions, a politically very sensitive issue in the country. According to Krugman, "France stands out even among countries with fiscal problems for its persistent inability to realistically focus on retirement". The official retirement age in France—the age at which one can stop working to receive a full pension—was only 62 before the 2023 reform. Macron managed to approve a gradual increase up to 64 in that year, amidst strong opposition in Parliament and on the streets, but the government had to suspend the entry into force of the measure to ensure the parliamentary support of the Socialist Party and Macron lost some popularity in the attempt. Thus, the retirement age still remains below that of most advanced economies. In Denmark and the United States, for example, it is 67. As Krugman indicates, many workers opt to retire even earlier in exchange for accepting a lower pension, so the real retirement age in France is lower than that of any other Western European country. Chadha sees a "generational problem" that is difficult to manage for French society and politicians. "Many of those who are protesting in the streets these days are young people who have been denied adequate education and are the ones financing the pensions of their elders," he states. "The cost of the pension system remains the taboo that no one wants to touch". "Order at home" As he told Maryam, an 18-year-old student who participated in the protests in Marseille, "the question of whether violence is legitimate is very complicated, but France, our history, is really based on revolution and sometimes we have to cause a really big impact". Her words reflect an idea very widespread in France. The cradle of the Revolution of 1789 and the political and intellectual movement of May 1968, there exists a deep-rooted culture of protest as a form of defense of social rights. As Maryam, many French people believe that their government does not treat them fairly nor offer the services to which they are entitled. That government feels the pressure of its voice in the streets and at the same time the voice that reflects the increase in the risk premium in the markets. In this context, the Managing Director of the International Monetary Fund, Kristalina Georgieva, launched a message to the French in an interview with the CNBC channel: "Get your house in order". Georgieva underlined the need to carry out fiscal adjustments in France and reduce its public deficit below 5%, and acknowledged the limited room for maneuver of a government in parliamentary minority, harassed by protests and in the last months of its term. However, she also stressed that the French economy is growing and that Europe now has more solid mechanisms than in the past, including those of the European Central Bank, to protect financial stability. 5% is the threshold that the government usually aims for, which these days tries to get Parliament to approve a budget that seems doomed to failure due to the rejection of the rest of political groups. Economists like Jagjit S. Chadha see the need for more aggressive adjustments. "It is not enough. To be convincing, any deficit target should be below 4%," he argues. But the political landscape hinders changes. Macron is in the final months of his second and last presidential term. The French are called to the polls next April to elect their new president and political leaders avoid including in their promises potentially unpopular reforms such as the pension system. The far-right and Euroskeptic Marine Le Pen, who leads the polls, has promised a five-year fiscal discipline plan that would reduce public spending by 140 trillion euros (about US$157.3 trillion) by cutting the size of the State and the French contribution to the European Union budget, but her proposal has been criticized for being too unambitious and vague. On the other end, the radical left candidate, Jean-Luc Mélenchon, has proposed forgiving the part of French debt held by the European Central Bank, which, according to many economists, would set a historical precedent and affect the credit of the debt of all countries that use the euro. The idea was flatly rejected by both the bank president, the French Christine Lagarde, and the government, which called it an "absolute nonsense". How can France end the problems In his last address to Parliament, Minister Lescure said that the bond interest had risen to 4.5% but expected it to stabilize around 2.5% in 2027. Krugman believes that the risk of France entering into suspension of payments in the next three years is "very low". And yet, he affirms that "the current situation in France is very worrying" because it still has an "unsustainable fiscal path". According to the Nobel laureate, this "creates the possibility of an explosive debt crisis" among the Eurozone countries, potentially more serious than the one that broke out in 2009. Unlike then, Europe today has containment mechanisms. The former ECB President Jean-Claude Trichet recalled that there are tools such as the European Stability Mechanism, although he warned that countries must show a credible effort to reduce their deficit before resorting to them. Other Eurozone countries could be affected if market distrust spreads: Greece, Italy, Belgium, and Spain all have debt above or close to 100%, a high level that makes them vulnerable. A new sovereign debt crisis could be corrosive to European unity. How would the countries that had to bear painful cuts to obtain the aid of their European partners in the previous crisis react if France were not required to make the same sacrifices? Another factor is the size of the French economy, the second largest in the Eurozone, only behind Germany. "If France needed to be rescued, it would be extremely expensive," Krugman explained. "France could have crossed the line from 'too big to sink' to 'too big to be rescued'". Chadha believes that the French, like citizens of other advanced economies, are suffering the consequences of "politicians with a focus on the short term who tend to worry more about their popularity than about implementing appropriate reforms". "I fear that either we start reforming soon or we could end up in the mother of all crises in the Eurozone," he warns. According to French authorities, they still have room to avoid that scenario. Moulin maintains that a 3% deficit in 2029 is possible, the government's goal, as long as Parliament approves a budget that respects the 5% target for 2027, although he admits that the higher cost of debt complicates the effort. The coming months will be key. If Parliament approves the 2027 budget and the candidates competing in the presidential elections in April present credible plans to bring public accounts into order, the "snowball" will remain a marginal effect. If not, it may start to grow while rolling dangerously downhill. - Download the new BBC World Service app. Choose BBC News Mundo and receive news, documentaries, and analysis alerts, all in one place. Important: the new application is not available in the United Kingdom or the United States. - You can also follow us on YouTube, Instagram, TikTok, Facebook, X, and on our WhatsApp channel. - And don't forget to subscribe here to our newsletter to receive a special selection of our best content every Friday.