Key facts
- France's 10-year bond risk premium over Germany surpassed 100 basis points for the first time since 2012.
- The French government aims to cut its budget deficit from 5.4% of output this year to 5% next year.
- Rising energy prices and potential European Central Bank rate hikes are hurting growth.
- Jean-Luc Melenchon has called for the French central bank to cancel government debt it holds.
- Marine Le Pen is advocating for lowering the retirement age, which would increase financial pressure.
- France's debt servicing costs are expected to be €4.5 billion higher than forecast this year.
France's 10-year borrowing costs have risen significantly faster than other developed economies, reaching a premium of 104 basis points over Germany's on Friday, a level not seen since the 2012 euro zone debt crisis. This widening spread reflects growing investor concern over France's high budget deficit and its ability to manage finances ahead of next year's presidential elections.
Investors are demanding higher compensation to hold French debt due to worries about the country's long-term financial stability. The deficit is currently 5.4% of output and the government aims to reduce it to 5% next year through €54 billion in spending cuts, though this target may be missed due to lower-than-expected growth and rising energy prices linked to the Middle East conflict. Opposition parties are expected to challenge the government's austerity measures, potentially leading to political instability.
Political figures like Jean-Luc Melenchon have proposed measures that could further strain public finances, such as canceling government debt held by the central bank. Marine Le Pen, a leading contender in polls, has suggested lowering the retirement age, which would also increase fiscal pressure. While some analysts believe the recent move in spreads may be limited in the near term, further political uncertainty, such as the fall of the government or a second-round presidential election between Melenchon and Le Pen, could push the spread wider, with Societe Generale suggesting a potential move to 120 basis points.