Panic in France, the fate of the country in the hands of Le Pen

The yield on 10-year French government bonds rose for the first time this week above Greek government bonds of similar maturity. Investors fear that Michel Barnier’s government will not succeed in getting the budget containing serious cuts accepted.

The yield spread of French bonds compared to German government bonds on Thursday morning exceeded that of Greece, which was once the epicenter of the Eurozone crisis, and was even higher on Friday morning. The former was 84.2 basis points, the latter 83.2. This represents a 12-year high for the yield spread on French bonds

said Andrew Pease, chief investment strategist at Russell Investments Financial Times-son. He believes that the market will force a compromise.

Barnier already made a major concession to Marine Le Pen’s party yesterday by backing off on a significant increase in the tax on electricity, hoping to avoid a no-confidence motion due next week that could lead to the overthrow of his government.

In a TV statement, French Finance Minister Antoine Armand tried to cool down the mood and rejected any comparison with Greece. France is not Greece, its economic and demographic strength is much greater, he emphasized.

The speculators have started

According to Bank of New York analysts, in the five-day period through Tuesday, French bonds experienced a strong selling wave, which was last seen at the end of 2022, when the entire eurozone was at its lowest point due to the energy crisis that unfolded after the Russian attack on Ukraine. Meanwhile, Greece’s international reputation is practically constantly improving thanks to the implementation of the painful budget reforms agreed to during the debt crisis. Last year, for the first time in a long time, the classification of the Greek public debt was raised to the investment category by the major credit rating agencies.

Referring to data from S&P Global Market Intelligence, the British financial newspaper writes that hedge funds are currently playing huge bets against French bonds. Its value is said to have reached 99.7 billion euros, which exceeds the peak of 85 billion euros reached during the 2008 financial crisis.

Since the government does not have a majority in the National Assembly, it will have to override the legislators with a constitutional mechanism. This, in turn, would allow the opposition to initiate a vote of no confidence. Thus, the fate of the French budget and Barnier’s government largely depends on the National Collapse party. Despite the concession on the electricity tax, the National Compact continued to threaten to overthrow the government if its demands were not met.

There is something to carve

Meanwhile, the French public finances are in an increasingly difficult situation, the original budget bill for 2025 wanted to save 60 billion euros through tax increases and spending cuts. The goal was to reduce the deficit to 5 percent of GDP next year from more than 6 percent this year. This would be necessary if only because the French national debt is currently approximately 120 percent of the country’s GDP.

The ECB’s latest financial stability report also emphasized the need for budgetary reforms. They warned that if the refinancing of expiring public debts becomes more expensive, by 2034 up to 4 percent of France’s GPD could be consumed annually by interest payments alone. We wrote more about this here.

There are also optimistic analysts. Gareth Hill, an expert at Royal London Asset Management a to Reuters he said Marine Le Pen and Barnier, who leads the National Compact, will eventually squeeze concessions from each other and come to some sort of agreement. Thus, this week’s fall in the price of French bonds may represent a buying opportunity. According to him, taking the positioning into account, this week’s fall was excessive, which is why they increased the weight of French papers in their portfolios compared to German papers.

In Germany, however, the market is starting to prepare for exactly the opposite processes. That the country might release the debt brake at the beginning of next year in order to stimulate the economy.