Public Debt Sustainability: Why Real Rates Are the Key
Sovereign debt sustainability rests on the gap between real rates and growth, not on the debt-to-GDP level. The shift from a deeply negative r – g gap to a near-zero gap restores a fiscal constraint that had been dormant for a decade.
The burden of sovereign debt is not measured by the headline nominal rate, but by the gap between the real rate paid and the real growth of the economy. This differential governs the trajectory of the debt-to-GDP ratio.
The reversal of real rates since 2022 calls into question fiscal equilibria that seemed settled during the decade of negative rates.
Public debt sustainability rests on the gap between real rates and growth. Analysis of the debt-to-GDP dynamic and its fragilities. This is unpacked carefully in the fiscal dominance macro regime atlas.
French public debt reached ≈112% of GDP at end-2025, according to INSEE data. The interest burden in the 2026 budget exceeds €55 billion — an amount that rivals the budget of France’s national education ministry. The empirical extension shows up in monetary metal anchored to public-finance sustainability. Yet these nominal figures are not enough to assess debt sustainability. What determines whether debt feeds on itself or stabilizes is the differential between the real rate paid on debt and the real growth rate of the economy — the condition economists summarize as the r – g gap.
The r – g Condition: The Core Mechanism
When the real rate paid on debt (r) sits below real growth (g), the debt-to-GDP ratio stabilizes or declines spontaneously — even without a primary surplus. This mechanism explains why heavily indebted countries like Italy, France or Japan could coexist with apparently sustainable public finances between 2012 and 2021: negative real rates made the r – g condition systematically favorable.
According to IMF estimates (Fiscal Monitor, October 2025), the average implicit real rate on advanced-economy debt has moved from ≈-1.5% in 2021 to ≈+0.8% in early 2026. With real growth oscillating around 1% in the eurozone, the r – g condition approaches zero — a neutral zone that only stabilizes debt provided the primary balance stays close to equilibrium. Understanding the centrality of real rates in macro dynamics is indispensable to assessing these fiscal trajectories.
The Protective Inertia of Legacy Debt
An element often overlooked in analysis: the rise in real rates does not transmit instantly to the average cost of outstanding debt. This transmission is explained in the mechanism by which markets detach from the yield curve signal. Sovereigns issue bonds at long maturities — the average maturity of French debt stands at ≈8.5 years according to Agence France Trésor. The stock of debt contracted at historically low rates between 2015 and 2021 continues to weigh favorably on the average cost, even as new issuance proceeds at significantly higher rates.
This inertia offers a temporal reprieve, not permanent protection. According to projections from the Cour des Comptes (Annual Report 2025), France’s interest burden could reach ≈€70 billion by 2028 if real rates hold at their current level — a doubling in five years. The channel through which monetary decisions transmit to the cost of debt runs directly through monetary transmission to the real cost of debt, with a lag that depends on the maturity structure.
Assessing debt sustainability from the debt-to-GDP ratio alone ignores the determining factor: the r – g differential. A country with 120% debt-to-GDP and a negative r – g gap sits in a more comfortable position than one at 60% debt-to-GDP whose real rates exceed growth. The debt level matters less than its dynamic, which is conditioned by real rates.
What Real Rate Normalization Changes
The shift from a deeply negative r – g gap to a near-zero gap — the early-2026 configuration for most advanced economies — restores a fiscal constraint that had disappeared for a decade. Fiscal room narrows: every point of primary deficit now weighs directly on the debt-to-GDP trajectory, whereas negative rates partially absorbed it.
For sovereign bond markets, this reconfiguration alters risk pricing. The dispersion of eurozone sovereign spreads — ≈70 basis points between Germany and France, ≈130 for Italy in early 2026 according to market data — reflects fiscal trajectory differences in an environment where real rates no longer act as an automatic shock absorber. This dynamic sits within the monetary conditions that determine these equilibria at the eurozone level.
Friction Points to Keep in Mind
- Debt sustainability depends on the r – g differential, not on the debt-to-GDP ratio in level — a gap that flips positive calls established equilibria into question.
- The inertia of low-rate legacy debt temporarily shields public budgets, but each new issuance at a positive real rate progressively raises the burden.
- The widening dispersion of eurozone sovereign spreads reflects the end of the negative real rate regime that artificially uniformized financing conditions.
Last updated — 14 June 2026
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