France is approaching a moment of humiliation in financial markets as budget chaos mounts

 

France is approaching a moment of humiliation in financial markets as budget chaos mounts

 

Investors appear ready to declare the country a worse credit risk than Greece.

 

November 27, 2024 1:59 pm CET

By Geoffrey Smith

https://www.politico.eu/article/france-budget-chaos-financial-markets-humiliation-michel-barnier/

 

The growing sense of crisis over France’s budget is driving the country toward a moment of humiliation in financial markets: It seems only a matter of time before investors declare France a worse credit risk than Greece.

 

The interest rate on France’s benchmark 10-year government bond came close to rising above its Greek counterpart on Wednesday, as investors priced in the risk that parties at both ends of the political spectrum will bring down Prime Minister Michel Barnier’s government over his planned budget for next year.

 

By 1 p.m. in Paris, the yield on the French bond was at 3.03 percent, while that on its Greek counterpart was a mere one-hundredth of a point higher at 3.04 percent.

 

Investors have been taking an ever-bleaker view on France as the argument over the budget has come to the boil. Barnier has proposed some €60 billion in tax increases and spending cuts to close a deficit that is projected to run at more than 6 percent of gross domestic product this year. But neither the far-right National Rally nor the left-wing New Popular Front bloc in parliament appear willing to support it at the moment.

 

As such, Barnier has planned on using a provision in the French Constitution that allows him to pass the budget without a parliamentary vote. This, however, exposes him to the risk of a vote of no confidence that would topple his government. The National Rally has said it will do just that unless Barnier addresses the red lines laid out by party leader Marine Le Pen.

 

Shorter-dated Greek debt already trades below its French equivalent, due to a number of technical market quirks that are hangovers from Greece’s bailout a decade ago and the European Central Bank’s bond-buying over recent years. However, the 10-year price is seen by most as a cleaner reflection of the two countries’ relative riskiness.

 

As recently as 2015, when then-Prime Minister Alexis Tsipras tried and failed to renegotiate Greece’s bailout terms, its 10-year bonds had yielded as much as 14 percentage points above French ones. The gap has gradually narrowed over the years, but was still as wide as 0.8 percentage points as recently as July, when voters deprived Macron of his majority in parliament.

 

Another measure of markets’ disenchantment with France is that the premium they are demanding over the comparable German bond is now higher than at any time since the depths of the eurozone sovereign debt crisis in 2012, at 0.87 percentage points.