For the first time, French government bond yields have surpassed Greece’s, reflecting growing investor unease about France’s fiscal and political stability. Here's what led to this historic shift and what it means for the future.

French Borrowing Costs Cross Greece’s

On Thursday, the 10-year yield on French government bonds briefly climbed to 3.02%, slightly above Greece’s 3.01%. Although it later settled at 2.95%, the episode highlighted rising doubts about France’s ability to manage its public finances.

• Why it matters: This reversal marks a significant moment for Eurozone markets, as Greece’s yields have historically been higher due to its debt crisis legacy.
• Political impact: The rise in French yields reflects scepticism about Prime Minister Michel Barnier’s minority government and its contentious €60bn package of tax hikes and spending cuts.

Political Tensions Heighten Market Risks

Barnier’s government faces intense political resistance, with a potential no-confidence vote looming. In a move to appease opposition parties, including Marine Le Pen’s far-right National Rally (RN), the government dropped a proposed electricity tax increase.

• Opposition demands: The RN has called for measures to protect purchasing power and stricter policies on migration and crime.
• Budget implications: Concessions made to secure political support may derail plans to reduce the deficit to 5% of GDP by 2025. France’s deficit is expected to exceed 6% this year, well above the EU’s 3% cap.

France Faces Increased Investor Scrutiny

France’s bond market is under pressure, with hedge funds ramping up bets against its debt. Bonds out on loan—a proxy for short selling—have surged to €99.7bn, up from €85bn during the 2008 financial crisis. Meanwhile, Greece has seen its borrowing costs drop as its economy recovers and its credit rating returns to investment grade.

• Market trends: France’s borrowing spread over Germany, a key risk indicator, reached a 12-year high earlier this week before easing slightly to 0.82 percentage points.
• Investor sentiment: According to BNY Investments, French bonds experienced their heaviest selling in two years, driven by fears of political instability and fiscal mismanagement.

What’s Next for France?

To avoid a deeper financial crisis, Barnier’s government must navigate treacherous political waters and enact meaningful fiscal reforms. However, without a parliamentary majority, the government may resort to constitutional measures to bypass opposition, further fuelling uncertainty.

• Potential scenarios:
  • The government survives the no-confidence vote but at the cost of further budget concessions, raising doubts about fiscal discipline.
  • A failure to pass the budget could lead to political turmoil, with markets demanding higher premiums to lend to France.

Conclusion: A Warning for Europe

The shift in bond yields is more than just a technicality—it’s a wake-up call for France and the Eurozone. Political gridlock and fiscal uncertainty could undermine investor confidence, while any failure to address these issues risks broader repercussions for the region’s financial stability.

Source: (FT.com)