The premium France pays to borrow over Germany jumped above a full percentage point on Friday, the first time that has happened since the euro zone debt crisis. The move reflects investor unease over France's stretched budget and a presidential election next year that could make deficit cuts even harder.
Spread hits levels unseen since 2012
France's borrowing premium over Germany has risen over 100 basis points, with 10-year yields climbing faster than in any other developed economy during a global bond selloff tied to rising energy prices. The French government must now pay a 104-basis-point premium on its 10-year bonds over Germany's, the first time since 2012.
That spread has doubled since a snap election in 2024 delivered a fractured parliament, making it harder to cut one of the euro zone's highest budget deficits. The government is trying to reduce the deficit from 5.4% of output this year to 5% next year through €54 billion of spending cuts, though opposition parties are likely to challenge the cuts and could bring the government down.
Growth, energy prices and politics add pressure
France will miss this year's original 5% deficit target because of lower-than-expected growth. Rising energy prices tied to the Middle East conflict could hurt growth further as investors bet on additional interest rate hikes from the European Central Bank. Concern is also mounting that next year's presidential election could derail deficit efforts, with the far-right's Marine Le Pen and the far-left's Jean-Luc Melenchon as frontrunners.
Melenchon's call for the French central bank to cancel government debt it holds has rattled investors, while Le Pen, who leads the polls, is advocating lowering the retirement age for some people, which would add to the pressure on the country's finances. By contrast, Italy's bond spread has risen much less than France's 40-basis-point rise since June.
Debt-servicing costs climb as risk grows
Higher borrowing costs add to debt-servicing expenses that have already become France's biggest budget line as it refinances hundreds of billions in COVID-era debt. The government now expects debt-servicing costs to run €4.5 billion above forecast this year and a further €10 billion higher next year.
Economists worry France faces a snowball effect, where borrowing costs spiral higher unless the government manages to post a primary surplus, which it is far from doing. According to Reuters: "France has real problems, and that they're not going to be solved anytime soon", said David Zahn, head of European fixed income at Franklin Templeton.
Further political uncertainty could still push the spread wider, analysts say, for example if the government falls and leaves France without a budget, or if Melenchon and Le Pen face each other in the second round of the presidential election. Societe Generale has not ruled out a move to 120 basis points.
Source: Investing.com
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