By Yoruk Bahceli and Leigh Thomas<\/p>\n
LONDON\/PARIS, Sept 18 (Reuters) \u2013 The premium France pays to borrow on the bond markets compared to Germany rose to more than a whole percentage point on Friday for the first time since the euro zone debt crisis, underscoring investor unease with its stretched finances ahead of elections next year.<\/p>\n
Here\u2019s a look at what\u2019s at stake:<\/p>\n
1\/ WHY HAS THE PREMIUM INVESTORS DEMAND \u200bTO HOLD FRENCH BONDS RISEN OVER 100 BASIS POINTS?<\/p>\n
France\u2019s 10-year borrowing costs have risen much faster than any other developed economy\u2019s in \u200ca global bond selloff driven by rising energy prices in recent weeks. Investors, worried about long-term finances across developed economies, are growing concerned as France struggles to cut its high budget deficit ahead of a presidential election next year that could make that task even harder.<\/p>\n
The French government must now pay a 104-basis-point premium on its 10-year bonds over Germany\u2019s for the first time since 2012 as investors seek more compensation to hold its debt.<\/p>\n
This is just the latest milestone for the spread between the two yields, which has doubled since a \u200csnap election \u200bin 2024 delivered a fractured parliament that has made it much harder to cut France\u2019s budget deficit, \u2060one of the highest in the euro zone.<\/p>\n
The \u2060government is trying to reduce it from 5.4% of output this year to 5% next year through \u20ac54 billion of tough spending cuts. Opposition parties are likely to challenge them in the coming months, potentially bringing the government down.<\/p>\n
France will miss this year\u2019s original 5% target due to lower-than-expected growth. Rising energy prices due to the Middle East conflict, which have prompted investors to bet on further European Central Bank rate hikes, could hurt \u200bgrowth even further.<\/p>\n
Concern is also mounting that next year\u2019s presidential election could derail efforts to lower the deficit as the far-right\u2019s Marine Le Pen and the far-left\u2019s Jean-Luc Melenchon are the frontrunners.<\/p>\n
Melenchon\u2019s call on the French central bank to cancel the government debt it holds has rattled investors, while Le Pen, \u2060who is leading the polls, is advocating lowering the retirement age for some people, which \u2060would add to the pressure on the country\u2019s finances.<\/p>\n
Italy\u2019s bond spread has also risen, but much less than the \u200b40 basis points rise in France since June.<\/p>\n
2\/ WHAT DOES IT MEAN FOR GOVERNMENT FINANCES?<\/p>\n
It makes new borrowing more expensive and adds to rising debt-servicing costs. These \u200bhave already become France\u2019s biggest budget expense, as it refinances hundreds of billions of COVID-era debt borrowed at ultra-low rates.<\/p>\n
The \u200cgovernment already expects debt-servicing costs will be \u20ac4.5 billion more than expected this year because of higher interest rates and a further \u20ac10 billion higher next year.<\/p>\n
Economists worry that with growth low and interest rates rising, 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.<\/p>\n
3\/ WHY DOES IT MATTER FOR MARKETS?<\/p>\n
It\u2019s a particularly telling sign that France\u2019s bond market, the euro zone\u2019s largest and traditionally regarded as \u2060a relatively safe asset, is losing that status.<\/p>\n
After all, the last time France paid a three-digit premium over Germany was at the height of the euro zone debt crisis in 2012, when the future of the euro was in question.<\/p>\n
France is also paying a higher premium than Italy, a country that has \u2060higher debt and much lower credit ratings.<\/p>\n
Many investors say they \u200care reluctant to favour French bonds in their portfolios.<\/p>\n
Paying a 100 basis-point spread over Germany shows \u201cFrance has real \u2060problems, and that they\u2019re not going to be solved anytime soon,\u201d said David Zahn, head of European fixed \u200bincome at Franklin \u200cTempleton.<\/p>\n
4\/ COULD THE SPREAD RISE EVEN FURTHER?<\/p>\n
Given the scale of the move already, some analysts see limited scope \u200bfor a significant \u2060move higher in the near term.<\/p>\n
\u201cAt some point, unless you think they\u2019re on a road to something really horrible, you\u2019ve got to make the judgement that there\u2019s enough compensation for taking on the sovereign risk,\u201d said L&G\u2019s head of macro strategy Chris Jeffery, who recently closed a position betting against French bonds.<\/p>\n
But further political uncertainty could still push the spread wider, analysts say, for example if the government falls and leaves France without a budget, or 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.<\/p>\n
(Reporting by Yoruk Bahceli and Leigh Thomas; \u200bediting by Amanda Cooper and Ros Russell)<\/p>\n","protected":false},"excerpt":{"rendered":"By Yoruk Bahceli and Leigh Thomas LONDON\/PARIS, Sept 18 (Reuters) \u2013 The premium France pays to borrow on…\n","protected":false},"author":2,"featured_media":141677,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2480],"tags":[2487,2486,2485],"class_list":["post-141908","post","type-post","status-publish","format-standard","has-post-thumbnail","category-euro-zone","tag-euro-area","tag-euro-zone","tag-eurozone"],"_links":{"self":[{"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/posts\/141908","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/comments?post=141908"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/posts\/141908\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/media\/141677"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/media?parent=141908"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/categories?post=141908"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/tags?post=141908"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}