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Rising interest rates expose the vulnerability of heavily indebted and persistent deficit countries. When governments have to spend more to pay down debt, there is less money left for other priorities like improving schools, building more housing or cutting taxes – which can drive frustrated voters onto the streets or into the arms of populist political parties.

“These rises in bond yields have very real implications,” said Mahmood Pradhan, a non-resident researcher at Bruegel, a think tank in Brussels, and former deputy director of the European department of the International Monetary Fund.

In a nightmare scenario, the dynamic becomes a self-fulfilling spiral: Politicians make more promises to appease aggrieved citizens, which leads to more borrowing and, in turn, scares away investors, who demand even higher rates to continue buying government bonds.

France shows how quickly the situation can degenerate when investor confidence deteriorates.

This week, the yield on French 10-year bonds almost reached 5%, the highest rate since 2002. Even more worrying, another measure of investor sentiment toward French debt has attracted new attention: the gap between the 10-year yields on French and German government debt. This gap shows that premium traders are demanding to hold French debt rather than that of Germany, considered the safest borrower in Europe.

This gap recently reached its largest disparity since 2012, after a surprisingly rapid increase last month. Investors have also demanded higher returns for loans to France than to Italy and Greece, which have long been considered the most problematic of Europe’s most indebted countries.

Across Europe, rising bond yields are testing the resilience of economies. The year started with low inflation and faster economic growth. But since the start of the war in Iran, energy prices have soared, driving up inflation and prompting the European Central Bank to raise interest rates twice this year. Traders expect another rate hike by the end of the year.

Rising borrowing costs expose governments to further economic shocks, such as sudden increases in food and energy prices. This will give them less room to support businesses and households, as they have done in recent years. “The limited capacity of countries to cope with these shocks is a new world for us,” Mr. Pradhan said.

In France, interest payments are one of the largest expenditures in the government budget and could eat up more than 90 billion euros ($100 billion) next year, more than planned spending on defense and education, according to the French Finance Ministry. Emmanuel Moulin, the governor of the French central bank, recently told the Financial Times that the country risks being “strangled by interest rates” if it does not improve its public finances.

Incumbent French political leaders – and some hopeful contenders – are working to reassure skeptical investors. But so far their overtures have had limited impact. The government said last week it would strive to reduce its budget deficit next year, after failing to do so this year. But even then, debt levels will continue to rise. French public debt already represents almost 120 percent of the size of the economy.

Investors have been closely following the budget negotiations in Paris, but they expect France’s budget problems could intensify between now and next spring’s presidential election. So far, all the major candidates have made big spending promises and failed to lay out compelling plans to reduce the debt. Marine Le Pen, the far-right candidate, pledged this week to reduce the deficit but did not detail how, while Jean-Luc Mélenchon, the far-left candidate, alarmed investors by proposing to cancel part of the country’s debt instead of repaying it.

France could get “some temporary relief in the markets if it can get certain measures passed in Parliament,” Mr. Pradhan said. “But beyond that, France has a debt problem.” The country has large spending needs that have been politically difficult to control, in areas such as pensions, which are made worse by rising interest payments.

These are issues shared elsewhere. In some ways, the United States is at the heart of the market tumult. In recent months, yields on U.S. Treasuries, the world’s largest and most influential bond market, have surged and triggered a global sell-off.

The United States still enjoys ample demand for its debt, and one of the big factors driving yields higher is the artificial intelligence boom in Silicon Valley. But economists warn that the country continues to push the limits of what investors could accept from governments if they are seen as unwilling or not ready to tackle rising debt levels. The U.S. gross national debt surpassed $40 trillion this summer, more than 120% of the size of the economy, while annual deficits are expected to continue to widen.

In Asia, the trajectory of Japanese debt has recently strained market nerves. Japan’s debt has for many years been more than twice the size of its economy, but recent government promises to increase spending and cut taxes have hurt Japan’s financial assets. The yen has weakened so much that the U.S. Treasury backed an intervention to prop up the currency, and yields on Japan’s 10-year bonds are trading at their highest levels in three decades.

The lesson applies broadly to highly indebted countries. Many governments have significantly increased borrowing in recent years to support their economies through a series of shocks, including the Covid-19 pandemic, the 2022 energy crisis after Russia’s full-scale invasion of Ukraine, and another energy shock this year due to the war in Iran. At the same time, public spending on health care and pensions for aging populations is increasing. In the short term, there are also demands, particularly in Europe, for defense spending to increase.

Global public debt is near its highest level since World War II and is on track to exceed 100% of global gross domestic product, the International Monetary Fund said Wednesday. “Advanced economies are the worst offenders,” said Kristalina Georgieva, executive director of the Washington-based organization.

In Europe, the risk is that the French bond tumult will spread to other euro zone debt markets, such as Italy’s, and trigger a new regional sovereign debt crisis, reminiscent of 2012.

“The situation demands an urgent and comprehensive set of policy responses,” Ms Georgieva said. Governments must present credible plans to reduce their deficits, even though many people expect their political leaders to intervene in the face of economic shocks, she noted. This is normally done through a combination of spending cuts and tax increases.

“There are some very difficult policy choices staring us in the face,” she said.