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French bonds and stocks fell on Wednesday as investors grew concerned that a dispute over a tense budget could bring down Prime Minister Michel Barnier’s government.
As a result of the sell-off, the difference between France’s 10-year borrowing costs and Germany’s borrowing costs rose to 0.9 percentage points, the lowest level since the 2012 eurozone crisis, but has since fallen to 0.86 percentage points. did.
The benchmark Cac40 stock index fell 1.2%, the worst performance among major European markets.
Mohit Kumar, chief European strategist at Jefferies, said the selloff was due to “concerns that the current government may not be able to meet its budget.”
Barnier is aiming to pass a budget that includes 60 billion euros in spending cuts and tax increases, despite not having an effective majority in parliament. He has acknowledged that this would require using constitutional means to override MPs, which would expose the government to a vote of no confidence that could bring it down.
Far-right leader Marine Le Pen has emerged as a key figure in the drama, as her People’s Party is the largest in the House of Commons and votes from that party are needed to pass the resolution. This is because After speaking with Barnier on Monday, Le Pen warned that the prime minister was not listening to Barnier’s demands to protect French people from tax hikes and repeated her threat to bring down the government.
In an interview with French broadcaster TF1 on Tuesday, Barnier called on the opposition to pass a budget, arguing that if it was not passed there would be “a big storm and a very serious turmoil in the financial markets.”
A sell-off in French government bonds has pushed the yield on 10-year bonds above 3% as investors worry about the sustainability of Paris’s debt amid political instability. Current yields are only slightly lower than those in Greece, which was at the center of the sovereign debt crisis more than a decade ago.
France’s budget deficit is on track to exceed 6% of gross domestic product (GDP) this year, more than double the EU’s target of 3%.
Brussels has imposed an “excessive deficit” monitoring process on France, urging it to reduce its budget over five years.
Barnier has promised to bring the deficit back to 5% of gross domestic product (GDP) by the end of 2025 (a goal economists currently see as unattainable) and bring it back within the EU by 2029. I was doing it.
“It’s hard to be optimistic about France’s future trajectory,” said Mark Dowding, chief investment officer at RBC BlueBay Asset Management. “There are risks such as: [government bonds] If the political situation worsens, there could be further selling pressure.”
