Faced with the prospect of a far-right or a far-left president, the bond market doesn\u2019t see France curbing its rapidly growing pile of debt anytime soon and has started weighing the possibility that the eurozone\u2019s second largest economy could default.<\/p>\n
\n
That\u2019s according to Thierry Wizman, global FX and rates strategist at Macquarie Group. In a note Thursday, he said the cost of insurance against a French default is now the highest among the major EU countries and the U.K.<\/p>\n
Early Friday, the signals sharpened further as France\u2019s five-year sovereign credit default swap rose to 81 basis points. At the same time, its 10-year bond yields jumped to 4.989%, the highest since 2002, and the premium over equivalent German yields widened to 152 basis points, the most since the eurozone debt crisis in 2011.<\/p>\n
Wizman warned: \u201cThe signal from France CDS pricing is that the OAT\/Bund spread widening is due to higher sovereign default risk in France.\u201d<\/p>\n
Those metrics later came off their highs, but France\u2019s fundamentals remain troubling, with anemic GDP growth, a budget deficit estimated at about 5.4% of GDP, and rising debt-service costs as yields jump.<\/p>\n
Meanwhile, France\u2019s debt-to-GDP ratio is expected to climb to 122% next year from 119% this year, and the government\u2019s latest plan failed to halt the surge in bond yields as investors doubted its credibility.<\/p>\n
\u201cBut our instinct is to also read the suddenly widening OAT\/Bund yield spread as a \u2018guilty\u2019 verdict on the recent direction of France\u2019s presidential politics,\u201d Wizman wrote. \u201cThe problem in particular is political polarization, which has arisen\u2014as it has across Europe\u2014mainly over the immigration issue, rather than fiscal issues. But in France, neither the populist Left nor the populist Right are fiscal hawks.\u201d<\/p>\n
Indeed, far-left presidential candidate Jean-Luc M\u00e9lenchon is campaigning on a plan to have the central bank simply cancel its holdings of French debt.<\/p>\n
And far-right leader Marine Le Pen, who is leading in the polls for the presidential race, has proposed tax cuts and vowed to bring down France\u2019s retirement age to as low as 60, despite the already generous pension system eating up an ever bigger slice of the budget.<\/p>\n
A runoff between the two candidates is expected next year, and Le Pen\u2019s National Rally (RN) party is seen as the likely winner.<\/p>\n
\u201cAs such, an outright default may be a low-probability event, but an RN-led presidency, with an adverse influence on the 2028 budget and credit-risk perceptions is a high-probability event, near 50%,\u201d Wizman added.<\/p>\n
He also pointed out that the presidential campaigns have barely begun, meaning the rhetoric around France\u2019s debt, a potential default, and budgetary politics is set to heat up and further damage the perception of the government\u2019s creditworthiness.<\/p>\n
To be sure, France isn\u2019t alone in facing high debt and market pressure on its bonds. The U.S. debt-to-GDP ratio is now 100%, and Japan\u2019s is well above 200%.<\/p>\n
But America\u2019s GDP growth is much more robust, and Japan enjoys a large pool of built-in demand for its debt from domestic investors. By contrast France\u2019s economy is projected to grow just 0.5% this year, and the government plans to issue over $380 billion in\u00a0medium- and long-term debt next year.<\/p>\n
Ales Koutny, head of international rates at Vanguard, told the Financial Times<\/em> that demand for debt in markets that become the center of geopolitical issues \u201ccan disappear in times of crisis,\u201d describing France as \u201clong-term degrading credit.\u201d<\/p>\nSimilarly, Scope Ratings also flagged political risks when it cut France\u2019s credit score to A+ from AA- last month, bringing it on par with Fitch and S&P Global Ratings.\u00a0<\/p>\n
In particular, the ratings firm cited the government\u2019s difficulties in meeting self-imposed deficit targets, adding that the sharp rise in bond yields this year will further increase borrowing costs and make any debt solution even more painful.<\/p>\n
\u201cScope expects political fragmentation to remain elevated beyond the 2027 presidential election, complicating the substantial fiscal consolidation required to stabilize public debt and increasing the risk that measures are diluted, delayed, or only partially implemented over coming years,\u201d it warned. \u201cThis weakens Scope\u2019s confidence in France\u2019s ability to halt, let alone reverse, the deterioration of its public finances over the medium term.\u201d<\/p>\n<\/div>\n
#France #debt #crisis #Investors #render #guilty #verdict #pricing #growing #odds #default<\/p>\n","protected":false},"excerpt":{"rendered":"
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