French Bond Risk Hits Highest Since Euro Crisis on Budget Battle
(Bloomberg) -- A measure of French bond risk rose to levels last seen during the euro-area debt crisis as a political standoff over the country’s budget threatens to bring down the government.
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The premium investors demand to hold 10-year French government bonds over German bonds climbed three basis points to 89 basis points on Wednesday, the highest level since 2012. The potential fall of the current government could still drive it higher — potentially all the way to 100 basis points, or 1 percentage point, according to Citigroup Inc. strategists.
The market nerves reflect investor concerns over Prime Minister Michel Barnier’s ability to pass a budget for next year and enact spending cuts to reduce the country’s deficit. The far-right National Rally party’s Marine Le Pen has vowed to bring down his administration with a no-confidence motion if its demands are not met, with the matter likely to come to a head in December.
Adding to the unease, Le Parisien newspaper reported that President Emmanuel Macron believed that Le Pen would carry out her threats, and that Barnier would be ousted soon by a no-confidence vote. Macron’s office denied he made such comments. Barnier warned the country faces a “storm” in financial markets if his budget proposals are rejected and the government is voted out of power.
French Premier Warns of Market ‘Storm’ If Budget Voted Down
“We could very well come to a situation where the government is again put into jeopardy,” said Greg Hirt, global chief investment officer for multi asset at Allianz Global Investors. “It could well be that we end up with a spread to bunds at the level of Italy.”
That would be unprecedented during the era of the euro, given lower-rated Italian bonds are historically among the highest-yielding in the region due to the country’s high debt load. Italian debt trades at a premium of around 125 basis points to Germany, and it would take that kind of level for France to become a longer-term buying opportunity, Hirt said.
The concerns over France, sparked in June by Macron calling a snap election, still pale in comparison with the market panic seen during the region’s debt troubles over a decade ago, when the French bond spread was more than twice as high. There are signs investors are starting to factor in a potential broader crisis, with a credit gauge of the risk that the nation leaves the euro area rising to near its highest level this year.