Amid financial turmoil in France, investors are pulling back, leading to a sell-off of government bonds and a spike in yields, which briefly exceeded those of Greece. The minority government faces instability, with rising yields signaling investor concerns over political and economic conditions. Prime Minister Barnier warns of “severe turbulence” due to a significant budget deficit, and speculation grows about possible European Central Bank intervention as political tensions escalate.
Amid the ongoing budget turmoil in France, investors are retreating from the nation, leading to a sell-off of government bonds. Consequently, yields have surged, briefly surpassing those of Greek bonds.
Recent events in France have sparked considerable volatility in the financial markets. For the first time, the nation’s financing costs climbed to match those of Greece. During early trading, the yield on ten-year French government bonds peaked at 3.02 percent, exceeding the 3.01 percent yield required by Greek lenders, before retracting. This situation reflects growing investor apprehension regarding France’s political and economic stability.
Potential for “Severe Turbulence”
In recent days, yields on French government bonds have risen sharply. Just yesterday, they recorded their highest risk premium over German bonds since the Eurozone debt crisis in 2012. The minority government led by Prime Minister Michel Barnier finds itself on shaky ground, facing potential dissolution after merely three months in power. The far-right National Front has threatened to express a lack of confidence next week if the burden on workers is not alleviated.
Barnier has cautioned of “severe turbulence” in financial markets due to a substantial budget deficit. He faces the challenge of addressing a public finance shortfall of 60 billion euros. “It appears that French politics may clash with the bond market,” stated Andrew Pease, chief investment strategist at Russell Investments. This market instability could ultimately compel the government to concede to external demands. Under pressure from both financial markets and opposition parties, Barnier announced today his decision to forgo plans to increase the electricity tax in the 2025 budget. However, the opposition deems this concession inadequate.
Currently, France’s debt stands at over 110 percent of its economic output, with only Italy and Greece in a worse position within Europe. This situation raises alarms not only for France but also for the continent as a whole. Mathieu Plane from the Paris Institute for Economic Research recently highlighted the necessity for austerity measures to avoid France becoming a financially unpredictable entity in Europe.
The French government, under Prime Minister Barnier, is expected to unveil the state budget for the upcoming year today.
Will the ECB Step In?
Concurrently, Finance Minister Antoine Armand attempted to downplay any parallels between the French and Greek economies. “France is not Greece,” he asserted in an interview with broadcaster BFMTV. “France possesses far superior economic and demographic strengths.” Currently, French borrowing costs remain significantly lower than those indicating a crisis in the bond market, with yields on ten-year bonds dropping to 2.96 percent compared to 2.98 percent in Greece during the day.
However, due to the budgetary conflict, investors are increasingly speculating whether the European Central Bank (ECB) might intervene to assist the heavily indebted nation. Concerns are growing over potential political instability should Barnier’s government succumb to the budget dispute. The ECB utilizes a monetary policy tool known as the Transmission Protection Instrument (TPI), which enables it to purchase unlimited government bonds from any Eurozone country. One stipulation for this intervention is that the country must experience an unjustified tightening of its financing conditions, with rising government bond yields occurring in a chaotic manner—such as during significant market turbulence.
In June, the EU Commission initiated a deficit procedure against France due to excessive new borrowing. Thus, it may prove challenging to argue that the country meets the ECB’s additional requirement for a “sound and sustainable economic policy.” Furthermore, no monetary authority has indicated that the ECB should support France at this time. Analysts from British bank Barclays have echoed this sentiment in their communications with investors, stating, “We find it improbable that the ECB will activate the Transmission Protection Instrument and purchase French government bonds if the budget is rejected and the government collapses.”
With insights from Till Bücker, ARD Financial Editorial Team