The Column – Market Insights
In unexpected times (December 2024) and indeed too early compared to how the financial markets then moved, this column had addressed the topic of the big problems that France had.
As often happens, the attention of operators and markets is focused on only a few things at a time and it took 18 months for this issue, which is very important in my opinion, to become “public domain”, influencing returns, stock markets and investor behavior.
Our cousins across the Alps are having quite a time turbulent on a political and social level and complicated on an economic level:
➢ The presidential elections of 18 April 2027 are around the corner and Marine Le Pen’s Front National (FN) is clearly leading in the polls (around 35%), followed by the left of Jean-Luc Mélenchon’s La France Insoumise (LFI) (around 17%). In short, the centrist and moderate parties that the French have always voted for are far behindwith leaders who do not inspire the citizens of a dissatisfied country that is protesting like never before.
➢ France is the country at Eurozone level that it has broken the rule of maximum 3% annual deficit several times compared to GDP (21 times from 1999 to today compared to 18 in Greece or 15 in Italy).
➢ The problem was relative as long as the relationship Debt/GDP of the country was low (but today the situation has changed since France with a 119% is the third worst country in the Eurozone and the one with the worst “trajectory” of all), and as long as the country was growing well (but here too there has been a notable decline in recent years).
➢ France is a country with one primary scale typically in negative (3.5% deficit compared to GDP the 2023-2025 average). The primary balance represents the air that a country has available to “breathe”, being the difference between state revenues and expenses (excluding interest).
➢ In France make important reformswhich weigh on the well-being of citizens and require sacrifices, it has been historically difficult if not impossible precisely because the strength of the unions, of the movements that “protect” the various economic sectors are very strong, capable of blocking the country whenever they want (from farmers to the Gilets Jaunes, from the CGT and SUD-RATP on the transport side to the CFDT on the services and tertiary side).
This situation is summarized by the MRB Partners graph which shows us well how the transalpines are in the worst situation among those of the main developed countries: analyzing 5 key factors (economic performance, degree of vulnerability of the banking system, dependence on foreign countries, flexibility on the monetary side and flexibility on the fiscal side) France is last!
The financial markets have begun to weigh heavily on this situation. Some data about it:
➢ French government bonds offer a higher yield than any Eurozone country (as I write we are around 5% for the ten-year bond) with a delta compared to Germany (ytm 3.3%) literally exploded to the absolute record of 170 basis points (from the 40-50 at which it has typically traded in the past). Italy yields much less (4.6%), as do Croatia or Slovakia to give other examples. A notable setback for those who until a few years ago represented the “heart” of the eurozone together with Austria, Germany, Belgium and the Netherlands.
➢ The rating assigned today to French debt it was lowered, but today it still remains higher than ours (A+ compared to BBB, 4 steps difference), while the market treats French bonds as if they had a much lower rating, bordering on investment grade.
➢ The index French stock market CAC40 underperforms European equity (Stoxx 600 index) increased by more than 15% in the last year, demonstrating a “distancing” of investors. The sectoral composition of the French index certainly played a role, but underperformance of this magnitude is still a very rare event.
➢ CDS (credit default swaps), which express the cost of insurance that must be paid to hedge against a possible default of an issuer (the French state in this case) went from 30bps to 90bps during 2026, a path opposite to ours (Italy dropped from 90 to 65bps). As a testimony to the greater perceived risk.
In short, a serious situation that cannot be easily resolved in the short term. The writer lived for 5 years in the country of the FROGS (nickname given to the French by English speakers) and then returned to live in Italy (former member of the elusive PIGS, the weakest countries in the Eurozone, once…) and confirms that he will extremely complicated to complete a serious reform of pensions, raise the number of hours worked to “European” levels, undermine part of the welfare system beyond the Alps.
On the market side, further shocks are possible and should occur used to buy government bonds of other Eurozone countries in our opinion, which are partially affected by the French contagion (Italy-Germany spread has in any case gone from 60 to 120bps, without the situation having changed one iota in our country we would say) such as Italy, but also Greece, Spain or Portugal. With better debt trajectories and certainly rosier situations on the pro-growth reform side.
Will the FROGS be able to do what the PIGS did in the Eurozone crisis between 2010 and 2015?
