IMF Managing Director Kristalina Georgieva warned France on Wednesday to rein in its deficit as bond markets lose patience with the country's finances. The warning lands as nationwide student protests enter their third week and French 10-year bond yields climb past Italy's.
Georgieva tells France to "get your house in order"
IMF chief Kristalina Georgieva delivered a blunt message to the French government in a CNBC interview on Wednesday: bring the country's finances under control. She told CNBC's Lisa Kim, on the sidelines of an event in Singapore, that France faces repeated borrowing shocks combined with a political dynamic that makes it harder for the finance ministry to set a clear path for tightening.
According to CNBC: "get your house in order", Georgieva said of her message to Paris. She noted there is a clear recognition in France that the deficit needs to come under 5%, after reaching 5.1% of GDP last year.
Bond yields climb as political crisis deepens
Political instability has pushed up yields on France's government bonds, known as OATs. Investors now demand a higher yield than they do for Italian government bonds, with French 10-year yields rising by more than 100 basis points since the start of the year.
The pressure comes as nationwide student protests stretch into their third week. The demonstrations reflect discontent with long study days, teacher shortages and rundown schools, and they coincide with the government's push to convince a politically fractured parliament to accept tens of billions of euros in spending cuts.
France is also subject to the EU's excessive deficit procedure, which recommends the country bring its national deficit closer to a reference value of 3%.
Georgieva sees Europe as better protected than in past crises
Asked whether the situation echoes the euro zone sovereign debt crisis of the early 2000s, Georgieva said Europe is in a stronger position now. She pointed to the strength of the European Central Bank and other instruments Europe has developed to protect against financial stability risks, adding that the French economy is still growing.
Georgieva conceded the fiscal adjustment will be tough given the backdrop of the protests. She said populations have grown used to governments stepping in during shocks since the Covid-19 pandemic, and argued that government, trade unions and the business community all need to help explain why painful changes serve the public interest.
Bond markets respond to fundamentals, and the fundamentals have changed, Georgieva said, pointing to higher inflation, higher interest rates and high government debt. She added that markets are looking for a signal that government borrowing will be contained, warning that yields could otherwise climb further.
Source: CNBC
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