Morgan Stanley is advising investors to bet against French and Belgian government debt as mounting budget pressures and political uncertainty push borrowing costs higher across the eurozone.
The investment bank has recommended a relative short position on French government bonds and maintained a short position on Belgian debt, arguing that both countries face insufficient fiscal consolidation.
The recommendations come as investors increasingly demand a premium to hold the debt of governments struggling with large deficits and rising debt burdens.
Koen De Leus, chief economist at BNP Paribas Fortis, warned that the Morgan Stanley recommendation should not be dismissed as a minor market call.
“Morgan Stanley is not a small player,” De Leus told Brussels Signal. If investors follow its recommendation to sell Belgian bonds, he said, this could put “serious upward pressure” on long-term interest rates.
“That is reasonably dangerous,” he said, arguing that Belgium does not want to find itself in the spotlight of already tense financial markets.
France has been at the centre of the sell-off. Its 10-year government bond yield has climbed to levels not seen since the aftermath of the global financial crisis, while the spread over German debt has approached one percentage point.
Morgan Stanley’s latest assessment reflects concerns that France’s fiscal position is deteriorating faster than the government can repair it.
French Finance Minister Roland Lescure recently cut the country’s 2026 growth forecast from 0.7 per cent to 0.5 per cent and acknowledged that Paris would miss its target of reducing the budget deficit to 5 per cent of GDP.
France’s debt-servicing bill is expected to reach around €65 billion this year, €4.5 billion more than previously budgeted. That would make interest payments one of the largest individual items in the French government’s budget. Public debt stood at around 117.6 per cent of GDP in the first quarter of 2026.
The situation is further complicated by political uncertainty. France has struggled to produce politically viable spending cuts, while the approach of the 2027 presidential election is making major fiscal decisions more difficult.
Belgium is facing a similar, although less severe, market challenge.
Prime Minister Bart De Wever’s government has begun negotiations over the 2027 federal budget and is looking for around €10 billion in savings or additional revenue. Belgium’s deficit is currently around 5.2 per cent of GDP, the highest in the eurozone, while public debt is expected to exceed 110 per cent of GDP this year.
Morgan Stanley’s recommendation puts Belgium in a group of eurozone countries where investors see insufficient progress on fiscal consolidation. The bank’s strategy is based on relative performance, meaning investors are betting that Belgian debt will perform worse than debt from countries with stronger fiscal positions, rather than predicting an outright default.
A short position on a country’s bonds does not mean that Morgan Stanley expects the country to run out of money. It means the bank expects the bonds to underperform comparable securities, usually through higher yields and falling prices.
De Leus said the recent rise in long-term yields is not solely a Belgian or French problem. Much of it reflects a broader increase in inflation expectations, driven partly by energy prices, as well as a higher long-term risk premium demanded by investors.
France’s public debt reached a new record high of €3,460.5 billion at the end of 2025. https://t.co/X0ABemovK1
— Brussels Signal (@brusselssignal) March 27, 2026
That premium reflects the additional return investors want for lending money over a long period in an increasingly uncertain environment, he said.
Investors face uncertainty over the future path of inflation as well as over government deficits in the United States, Europe and Japan, all of which already carry high levels of public debt.
According to De Leus, the risks associated with inflation and government finances had generally declined from the 1980s until around 2020, as central banks repeatedly intervened during periods of market stress. Since 2020, however, those risks have been rising again he said, with the uncertainty surrounding US policy under President Donald Trump adding to the picture.
Previous episodes, such as the eurozone debt crisis in 2012, were largely driven by concerns about individual countries. The current environment is different, De Leus argued, with a broader risk premium being applied across long-term debt markets alongside country-specific premiums.
That means long-term borrowing costs can rise across the board while individual countries are periodically singled out by investors.
Belgium is increasingly one of them.
The spread between Belgian and German government borrowing costs has been widening, although Belgium remains in a better position than France. De Leus said the difference in recent spread movements was significant: The French premium over Germany had risen by around 30 basis points, compared with roughly 10 basis points for Belgium.
The difference, he argued, is largely political.
Higher yields themselves create a problem for governments already struggling with debt. As investors demand higher returns, governments must pay more to refinance existing debt and issue new bonds. That raises interest costs, which in turn makes it harder to bring down deficits.
Belgium’s debt structure provides some protection because the government does not have to refinance its entire debt at today’s rates. The average maturity of Belgian government debt is around 10 to 12 years.
But the debt is continually being rolled over. Each year, a portion has to be refinanced, meaning that higher rates gradually feed through into the government’s interest bill.
This makes fiscal consolidation increasingly important. De Leus said Belgium needs to stabilise both its budget deficit and its interest costs, with the €10 billion currently being sought by the government likely to be only part of the adjustment required. Including other measures, the total effort could approach €17 billion.
That will not be politically painless.
Belgium has already experienced significant strikes and protests over the government’s attempts to reduce spending and reform the welfare and pension systems. Further consolidation is likely to bring additional political resistance.
Germany faces fiscal difficulties of its own, De Leus said, but starts from a stronger position because of its lower debt burden and greater fiscal discipline. Its recent increase in borrowing is being channelled into investment, while Belgium and France face the more difficult combination of high debt, weak growth and rising interest costs.
The International Monetary Fund has delivered a strong warning to France over its persistently high public spending and elevated debt levels, cautioning that the pace of fiscal consolidation remains too slow and carries significant risks to debt sustainability.…
— Brussels Signal (@brusselssignal) May 22, 2026
The wider European bond market is under pressure as well. The European Central Bank has kept monetary policy restrictive, while higher energy prices have pushed up inflation expectations and increased pressure on long-term yields.
France’s 10-year yield has already reached around 4.45 per cent, its highest level since 2008, while its spread over German debt has widened to around 0.9 percentage points.
For France and Belgium, the problem is therefore occurring on two fronts: Governments need to convince investors that their finances are sustainable at the same time as borrowing costs are rising.
De Leus sees the current situation as a warning rather than an immediate crisis.
He compared it to Ernest Hemingway’s famous description of bankruptcy: “gradually and then suddenly”.
Belgium is still in the gradual phase, he said. But if investors become sufficiently concerned, a relatively modest rise in yields could turn into a much more serious problem, forcing the government to refinance debt at rates perhaps two percentage points higher than before.
For now, Morgan Stanley’s recommendation is best understood as a warning shot across the bow of the Belgian government.
But the longer fiscal consolidation is delayed, De Leus warned, the more the government risks having to make its decisions under pressure from the bond market rather than from parliament.
Belgium’s public finances have veered further off track, with official projections now pointing to a national debt load of 120 per cent of GDP by 2030. https://t.co/DRi7TfQwgf
— Brussels Signal (@brusselssignal) June 11, 2025
