French bond yields echo Greek crisis amid political turmoil
A historic event has occurred in the European debt market as the yield on French 10-year government bonds has matched that of Greek bonds for the first time. This is a symbolic moment, highlighting investors' increasing concerns about the state of France's public finances.
The yield on French 10-year bonds, as reported by Bloomberg, rose on Thursday to 3.03 per cent, reaching the level observed for similar Greek bonds. This is an unprecedented situation, considering that French bonds have traditionally been regarded as some of the safest in the eurozone, while Greece was at the epicentre of a debt crisis just a decade ago.
Political deadlock threatens finances
The main reason for the pressure on French bonds is the risk of a political deadlock over next year's budget. The budget presented by Prime Minister Michel Barnier includes spending cuts and tax increases worth €60 (£50) billion, intended to help reduce the deficit from 6.1 per cent of GDP in 2024 to about 5 per cent in 2025.
However, the far-right National Rally of Marine Le Pen is threatening to vote for a motion of no confidence in the government if their demands, including changes to the planned increases in electricity prices and limits on pension spending, are not met. Finance Minister Antoine Armand has expressed a willingness to make concessions, but has not yet specified their scope.
Investors losing confidence
The situation in the bond market illustrates a continuing loss of investor confidence in the French economy. Over the last five days leading up to Tuesday, French bonds experienced the largest weekly capital outflow in over two years, according to BNY, the world's largest custodian bank. According to the Banque de France, more than half of France's public debt is held by foreign investors.
Market experts have highlighted structural problems within the French economy. "The PIGS countries were forced to carry out structural reforms after the European crisis, which ultimately paid off. France never undertook such reforms, and today it must pay the price," says Sonia Renoult, a senior interest rate strategist at ABN Amro Bank NV in Amsterdam.
France's problems are deepening at a time when investors already harbour a negative perception of Europe due to the threat of US tariffs and tensions related to Russia. According to some market analysts, such as those at Allianz Global Investors, there is a risk that the yield on French bonds may soon match that of Italian bonds, which currently offer only a 40 basis points premium.
