Turmoil in the government bond market is reviving memories of the eurozone debt crisis 15 years ago – but this time France is in the firing line.
Concerns over Paris’s fiscal position are pushing its borrowing costs up, amid a global sell-off of sovereign debt. This pushed the gap between France and Germany’s borrowing costs, a key measure of investor concern, to its widest level since 2012.
Yesterday the yield on French 10-year government bonds (or OATs) yields jumped to their highest level since 2002, before dipping back as the bond rout eased.
Investors are reluctant to eat their OATs because of political uncertainty, with presidential elections scheduled for 2027, and concerns over France’s public debt, which has climbed to a record high.
Jim Reid, a Deutsche Bank strategist, said that yesterday the Franco-German 10-year spread (+13.9bps) experienced its biggest daily jump since March 2020 at the height of the Covid turmoil.
He told clients this morning: “Markets stumbled yesterday as we began Q4, with mounting signs of financial stress focused on Europe. In fact, the daily moves were reminiscent of the euro crisis in many respects, with sovereign contagion a big talking point.”
France’s government did try to cool the situation yesterday by proposing a budget for next year including €43bn in cuts and tax rises.
Under the proposed plan, the tax burden would rise while spending growth would be slowed through slashing state spending, and capping increases to pensions and civil servant salaries.
The finance minister, Roland Lescure, said it was important to put France back on track for deficit reduction.
But even with this plan, the French budget deficit would only fall to 5% of GDP next year.
Analysts at ING warn that this deficit would be “far too high” to prevent France’s national debt (already 119% of GDP) from rising higher.
The euro is trading close to the 17-month low hit yesterday, when the single currency fell by more than 0.75% to as low as €1.1214.
Today’s key events
• 9am BST: UN’s FAO Food Price Index
• 10am BST: eurozone flash inflation reading for September
• 1.30pm BST: US non-farm payrolls employment report
• 3pm BST: US factory orders report for August
We’ll be tracking all the main events throughout the day on our business live blog …
