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France’s borrowing costs have risen above those of Greece for the first time, as investors fret that Michel Barnier’s government could fail to pass a belt-tightening budget.
The 10-year yield on French government debt briefly reached 3.02 per cent in early trading on Thursday, crossing above the 3.01 per cent yield demanded by lenders to Greece, before switching back.
The crossover reflects an upheaval in the perceived riskiness of Eurozone borrowers and underscores investors’ concern about France’s political and fiscal outlook at a time when Barnier’s minority administration is struggling to push through €60bn of tax increases and spending cuts.
“Looks like French politics are about to collide with the bond market,” said Andrew Pease, chief investment strategist at Russell Investments, as he suggested that market turmoil would eventually force politicians to accept fiscal discipline. “I think we know who wins.”
Amid pressure from markets and opposition parties, the prime minister’s team has signalled that it is willing to make further concessions to its budget plans and called on the opposition to make compromises of its own.
“We can still be responsible and work together to improve the budget . . . or there is another road of uncertainty and . . . leaping into the budgetary and financial unknown,” said finance minister Antoine Armand, who also sought to dismiss any comparison between the French and Greek economies.
“France is not Greece,” he added on BFMTV. “France has . . . far superior economic and demographic power which means it is not Greece.”
French borrowing costs remain well below levels that would signify a bond market crisis, and 10-year bond yields fell back to 2.95 per cent later on Thursday, compared with Greece’s 2.99 per cent. France’s spread above German yields — a key measure of the riskiness of French bonds — has fallen back to 0.82 percentage points from a 12-year high of 0.9 points earlier in the week.
But Thursday’s moves underscore how investors are reclassifying Paris as one of the Eurozone’s riskier borrowers.
France’s government bond market endured its worst bout of selling in two years during the five trading days to Tuesday, according to flow data from BNY Investments. Geoff Yu, senior markets strategist at BNY, said it was the “most concentrated round of selling . . . since the height of the European energy crisis in late 2022”.
Greek bond yields have also fallen markedly as the country’s economy has recovered since its bailout during the 2012 crisis. Last year, Athens’ credit rating was lifted to investment grade for the first time.
Hedge funds have also built up bigger bets against French debt than during the nadir of the 2008 global financial crisis, according to data from S&P Global Market Intelligence.
Bonds out on loan — a measure of hedge fund short selling, or betting on a falling price — are now €99.7bn, compared with just under €85bn in September 2008.
The French budget’s fate and that of Barnier’s administration will largely be in the hands of the far-right leader Marine Le Pen, whose Rassemblement National party is an important voting bloc in the National Assembly.
Le Pen has ramped up threats that the RN will move against the government if its budget demands, such as not raising taxes on electricity or cutting reimbursement for medicines and doctors’ visits, are not met.
Aides to Barnier and Le Pen have been negotiating privately in recent days
The RN said on Thursday that the current draft budget was “not acceptable in the current form” and “invited” Barnier to abandon planned tax rises on electricity. The party also continues to push for a reduced French contribution to the EU budget.
Barnier, whose government is under growing pressure as opposition parties threaten to topple it over the budget, conceded to one of the RN demands and said he would no longer plan to increase electricity taxes from 9 to 14 per cent.
“Whether it was in my majority or the opposition leaders I received: almost all of them asked me to evolve,” Michel Barnier told Le Figaro.
Since the government lacks a majority in the assembly, it will probably have to use a constitutional mechanism to override lawmakers, which in turn would allow the opposition to call a no-confidence vote.
Concessions the government has already made to the proposed budget in recent weeks may render impossible its goal to bring back the deficit to 5 per cent of national output by the end of 2025.
France overshot its deficit target for this year and will finish at above 6 per cent of GDP — far above the EU limit of 3 per cent of GDP.
Armand said the government was “ready to make measured concessions in any area” to “avoid the storm” in financial markets.
But he added that efforts for fiscal discipline would have to be made across the board.
