Eyes on the France. The fear of a Greece beyond the Alps worries Brussels and the markets. Yesterday the Paris spread hit its highest since the 2012 eurozone debt crisis and the French markets have performed far below expectations and forecasts this year. Everything is triggered by the specter of a new political crisis in Paris, with the inevitable possible repercussions on the whole of Europe.
The spread between French ten-year government bonds (OAT) and German Bunds reached the 90 basis point level on Wednesday, the highest in more than a decade. The yield spread has returned to levels not seen since the sovereign debt crisis, fueled by the risk of a government collapse Michel Barnierwho took office only two months ago. The yield on 10-year French government bonds has exceeded the 3% threshold, coming dangerously close to the level of Greek bonds (3.05%). And the Paris Stock Exchange saw the index CAC 40 slip to the lowest levels in a year (today there is, at the moment, a slight recovery), with the main French banks in sharp decline.
The political crisis, which triggered the market reaction, arose from the government’s budget law Barniera 60 billion euro package that includes cuts to public spending and tax increases. This plan, designed to contain the deficit and reduce the debt-to-GDP ratio, expected to reach 112.4% in 2024, has sparked strong opposition. The far-right leader Marine Le Penwith his National Rallyand the forces of the left seem ready to unite to vote on a motion of no confidence against Barnierif the prime minister forced the approval of the budget with constitutional instruments.
If the government were to fall, a power vacuum would open just as France faces a public deficit estimated at 6.1% of GDP, well above European limits. The risk of instability is reminiscent of the Greek scenario of 2010-2012, with France which could become an epicenter of tensions for international markets.
The French crisis is part of an already fragile European context. Germany is grappling with a technical recession and new elections scheduled for February. Furthermore, the wait for the return of Donald Trump at the White House, with the threat of new customs duties, further aggravates the uncertainties. The problems in Paris and Berlin could reshape the balance in the eurozone. For now, Italy appears to be benefiting from greater political stability, with its spread declining to 124 basis points. However, Italy’s cost of debt remains the highest in the eurozone, and the fragility of its main trading partners, France and Germany, could have negative long-term repercussions.
What will happen? The focus is on the psychological threshold of 100 basis points for the spread OAT-Bunda level that could trigger further selling in French stocks. S&P should update the company’s rating tomorrow evening Francewhich had already been downgraded to AA- in May. Also Fitch And Moody’s they maintain a negative outlook on the country. With more than half of French public debt in the hands of international investors, any sign of instability risks being amplified on global markets.
