Could France Really Cancel 18% of Its National Debt?

Why does France owe money to its own central bank?

Mélenchon Proposes Wiping Out 18% of French Debt as PM Warns Investors Could Flee

Jean-Luc Mélenchon has detonated one of the most radical economic proposals of France’s emerging 2027 presidential campaign by arguing that the country should effectively erase the portion of its public debt held by the Banque de France. The radical-left presidential candidate says roughly 18% of France’s debt could be removed, dramatically reducing the headline burden and creating room for greater public spending.

Prime Minister Sébastien Lecornu has responded with an extraordinary warning. He branded the proposal “fraud in its purest form” and argued that threatening France’s reputation as a borrower could frighten investors just as the government needs the markets more than ever. France plans €310 billion of net medium and long-term government bond issuance during 2026.

The confrontation cuts directly into France’s greatest economic vulnerability. Public debt already stands above 116% of gross domestic product, borrowing costs have risen and the Banque de France expects the debt ratio to continue climbing without considerably stronger fiscal consolidation.

Mélenchon Says France Can Simply Cancel the Debt

Mélenchon’s argument starts with an apparently simple observation. A significant quantity of French sovereign debt accumulated during years of central-bank bond purchasing is sitting on the balance sheet of the Banque de France, which forms part of the Eurosystem. Rather than continuing to treat those bonds like conventional debt, he wants them cancelled or effectively frozen.

The candidate has presented the concept in deliberately provocative terms, saying the approximately 18% held by the Banque de France could essentially be thrown “in the fire”. More recently he has advocated the European Central Bank freezing government debts, beginning with debt accumulated during the Covid period.

The attraction is obvious. If hundreds of billions of euros disappeared from France’s headline liabilities without equivalent tax rises or spending cuts, the political argument over austerity would change overnight. Mélenchon could claim that money otherwise constrained by debt reduction could instead support public services, investment and his wider economic programme.

That is precisely why the proposal has become so politically explosive.

France Is Already Walking a Debt Tightrope

France does not enter this debate with comfortable public finances. The deficit reached 5.1% of GDP in 2025, while the Banque de France forecasts it could deteriorate slightly to around 5.2% in 2026 without additional savings. Its June projections suggest the public-debt ratio could climb to around 122% of GDP by 2028 under its assumptions.

The government’s own 2026 budget framework envisaged Maastricht debt reaching about 118.2% of GDP this year. That compares with 113.2% in 2024, illustrating how quickly the burden has been expanding.

The International Monetary Fund has separately warned that France faces high deficits, modest growth and rising spending pressures, calling for a credible multi-year fiscal strategy. At the end of 2025, approximately 55% of French public debt was owned by international investors across Europe, North America and Asia, according to its assessment.

That exposure matters enormously.

France does not finance itself merely through domestic institutions that can be politically instructed to accept government policy. It continuously sells debt into vast global capital markets.

The Banque de France reported that non-residents held 55.9% of French general-government long-term debt securities at the end of the first quarter of 2026, up from 54.6% three months earlier. Non-resident investors bought €99 billion of French public-sector debt securities during that quarter alone.

Mélenchon’s opponents therefore see a potentially brutal contradiction: eliminating existing central-bank debt may look attractive on paper, but the French government would still need investors to buy enormous quantities of new debt afterwards.

Lecornu Warns Lenders Could Walk Away

That is the heart of Lecornu’s attack.

France’s official financing programme calls for €310 billion of medium and long-term issuance this year, net of buybacks. The prime minister argues that investors asked to finance those bonds would have to consider whether a future French administration might eventually decide that some government obligations were negotiable.

His warning was stark: if France were perceived as reneging on its signature, lenders could either demand dramatically higher interest rates or refuse to lend on acceptable terms.

Even without anything approaching a default, relatively small increases in yields matter when refinancing requirements are enormous.

French borrowing costs have already been under pressure. Ten-year government yields climbed above 4.1% this month to levels not seen since 2008 amid renewed concern over the budget and political uncertainty.

The Banque de France has also warned that European sovereign markets must absorb high levels of issuance during 2026 and that maintaining the proper functioning of the French government-bond market is essential. Its financial-stability analysis specifically highlighted the growing importance of more price-sensitive investors as central-bank quantitative tightening reduces the Eurosystem’s presence.

That makes confidence less abstract than it sounds. France needs willing buyers repeatedly, at enormous scale.

Would Cancelling Central-Bank Debt Actually Make France Richer?

This is where the proposal becomes more complicated than its political presentation.

The Banque de France’s July balance sheet showed approximately €542 billion of public-administration debt securities among its holdings. Those assets sit on one side of the central bank’s balance sheet; eliminating them does not automatically create the equivalent amount of genuine new national wealth.

Former IMF chief economist Olivier Blanchard argues that cancelling the bonds would largely move losses within the public system. Without the bonds, the Banque de France would lose the interest income associated with them and therefore potentially return less profit to the French state. He argues the apparent fiscal windfall is therefore misleading while the potential confidence shock is real.

Mélenchon is not entirely without heavyweight support. Investment banker Matthieu Pigasse has argued that central-bank-held debt could be cancelled without meaningful economic or financial consequences, reflecting a broader school of thought on the left that treats sovereign debt held inside the central banking system differently from debt owed to conventional private creditors.

The disagreement therefore goes deeper than whether the bonds physically exist.

It is about whether a government and its central bank should treat obligations between different parts of the public monetary system in the same way as liabilities owed to outside investors.

The Euro Creates an Even Bigger Obstacle

France does not control its monetary system alone.

The Banque de France operates within the Eurosystem, while the European Central Bank controls monetary policy for the eurozone. European treaties contain explicit restrictions designed to prevent central banks from directly financing governments.

Article 123 of the Treaty on the Functioning of the European Union prohibits credit facilities from the ECB or national central banks to governments and prohibits direct purchases of government debt. The ECB has consistently interpreted the monetary-financing prohibition broadly because it is intended to prevent governments using central banks to escape normal fiscal constraints.

Cancelling sovereign bonds already purchased on secondary markets raises a particularly sensitive question because the government would ultimately receive financing without having to repay the asset.

Former Banque de France governor François Villeroy de Galhau has previously argued that cancelling the central bank’s French sovereign holdings would be incompatible with France remaining inside the euro and could ultimately leave French taxpayers covering losses at the central bank.

Mélenchon’s proposal therefore cannot realistically be viewed as a simple domestic accounting instruction.

It would potentially trigger a confrontation over the architecture of the single currency itself.

The Political Timing Makes the Proposal More Dangerous

There is another reason the argument is suddenly so important: Mélenchon is not merely making an academic proposal.

France is moving towards the 2027 presidential election, and recent polling cited in reporting on the dispute placed him in position to reach a second-round contest against Marine Le Pen, ahead of mainstream alternatives.

That transforms the market calculation.

Investors do not necessarily wait for policies to become law before repricing risk. If traders begin to believe that a candidate advocating debt cancellation has a credible route to the Élysée Palace, the probability of future confrontation can itself influence yields, spreads and demand for French securities.

France has already experienced how quickly political instability can enter sovereign-debt prices. The IMF noted that the spread between ten-year French and German government bonds surged above 85 basis points during heightened French sovereign stress in October 2025 before later narrowing.

The 2027 campaign could reopen that pressure well before polling day.

France’s Real Fight Is Over Who Pays for the Debt

Mélenchon’s proposal has succeeded politically because it attacks the assumption at the centre of France’s fiscal debate: that a debt burden above 116% of GDP must ultimately be controlled through some mixture of lower spending, higher revenues and economic growth.

His answer is radically different. If a large creditor is effectively part of the state-controlled monetary architecture, he questions why that debt should restrain future governments at all.

His opponents respond that the supposed shortcut merely disguises where the bill eventually lands — while risking the credibility on which all France’s remaining borrowing depends.

That dispute is likely to become one of the defining economic arguments of the presidential campaign.

France’s problem is no longer merely that it owes more than €3 trillion or that its debt ratio is climbing. It is that the country must persuade investors to keep financing enormous deficits at the same moment its political system is beginning to debate whether hundreds of billions of euros of existing sovereign obligations should exist at all.

For Mélenchon, that is liberation from an artificial constraint.

For Lecornu, it is precisely the sort of argument that could make the people France needs to lend it money start heading for the door.