Concerns are rising over France’s borrowing rates, with the gap between ten-year bond yields compared to Germany reaching its highest level since 2012. Political uncertainty ahead of a crucial Senate vote on the budget has investors anxious, particularly about the National Rally’s potential role as a kingmaker. Meanwhile, France’s public deficit remains a concern, projected at 6.2% of GDP, significantly above the EU’s 3% limit, as it awaits a key rating decision from Standard and Poor’s.
Rising Concerns Over France’s Borrowing Rates
Warning signs are increasingly evident in the financial landscape. The disparity between the ten-year benchmark borrowing rates in France and Germany has surged to its highest level since 2012, raising alarms among investors regarding the budget vote and the stability of Michel Barnier’s administration.
As of 17:20 GMT on Tuesday, the yield on ten-year French government bonds stood at 3.05%, while German bonds were significantly lower at 2.18%. This creates a spread of 0.87 percentage points, marking the largest gap observed in over a decade. Investment expert John Plassard from Mirabaud highlights that this rate differential is a crucial gauge of market confidence in France compared to Germany and reflects the nation’s economic outlook. He pointed out that the finance bill, which was previously rejected in the Assembly, is now undergoing public scrutiny in the Senate.
Political Uncertainty and Market Reactions
A pivotal vote in the Senate is set for December 12. Following this, a joint committee comprising seven deputies and seven senators will strive to reach a budgetary compromise. If they succeed, the final version will likely invoke the 49.3 procedure upon returning to the deputies, leading to a motion of censure being reviewed around December 20. According to Marine Mazet, a rate strategist at Nomura, the critical question for the markets is whether the National Rally (RN) will choose to abstain during the confidence vote. The center and right parties are expected to support Barnier, while the New Popular Front (NFP) plans to oppose him, positioning the RN as a potential kingmaker in this scenario.
Experts are concerned about the precarious political situation in France. Aurélien Buffaut, a bond manager at Delubac AM, notes that the RN’s pressure on the government could lead to an increased likelihood of a motion of censure, which would significantly impact market stability. Investors are particularly anxious about the extent to which Barnier will compromise and the costs associated with these decisions. Should the government collapse by the end of December, it could trigger heightened political and fiscal instability at a time when market liquidity is limited, potentially resulting in volatile market reactions.
Germany is also in the midst of a political crisis, following the collapse of Olaf Scholz’s coalition in early November. However, unlike France, Germany enjoys considerable budgetary flexibility, which helps maintain market confidence, according to Mabrouk Chetouane, head of market strategy at Natixis IM. Meanwhile, France awaits a crucial rating decision from Standard and Poor’s this Friday, a verdict that comes as the nation grapples with an excessive deficit procedure imposed by the European Commission.
With a public deficit projected to decrease to 6.2% of GDP this year, France’s performance remains among the weakest in the EU, second only to Romania, and is far from the 3% threshold permitted by EU regulations.