France braces debt sell-off as protests deepen budget strain
Violent protests over living costs and school conditions are adding pressure to France’s bond market as the government struggles to pass a budget and control…
France’s unrest is sharpening concern about the government’s ability to control its debt as investors weigh whether the country’s borrowing costs will stay high. France braces debt sell-off risks after protests over rising living costs and poor school conditions swept the country over the weekend.
Violence and looting broke out in several cities. Shops were ransacked in Paris and elsewhere, while a fire devastated the historic town hall in Limoges, west-central France.
The political pressure is landing on an already battered bond market. French government bonds, known as OATs, have been among the hardest hit in a global sell-off driven by inflation fears, higher interest-rate expectations and concerns about government debt.
“French OATs continue to be the punching bag in the ongoing selloff in sovereign bond markets,” Elias Hilmer, a markets economist at Capital Economics, wrote in a note on Friday.
French debt strains diverge from Europe
Early on Monday, France’s 10-year OAT yield was 8 basis points higher at 4.86%, while Germany’s 10-year bond yield was flat at 3.41%. French yields have risen much faster this year than German government debt yields, widening the gap as investors demand a bigger premium to hold French bonds.
The unrest comes as the government struggles to pass a budget and bring debt under control ahead of next year’s presidential election. Investment manager Ninety One warned that if France fails to pass its 2027 budget, its deficit could exceed 6% of GDP next year, more than double the European Union’s 3% limit.
Passing the budget may not settle the issue. Sahil Mahtani, director at Ninety One’s Investment Institute, said it would offer only a temporary fix. The presidential election next year could be followed by another parliamentary election, potentially leaving France without a clear governing majority and extending budget uncertainty into 2028.
The pressure reaches beyond financial markets. Persistent borrowing costs could make it harder for the government to manage its finances, while uncertainty over public spending puts the budget debate and proposed reforms at the center of a politically volatile period. Pension reform is a particular flashpoint: changes could help stabilize the country’s debt trajectory, but face strong opposition.
“If we want to see some real improvement in the debt dynamic of France, it will need to reform the pension system, which costs much more money than elsewhere. The issue for that is that it's highly unpopular,” Charlotte de Montpellier, ING’s senior economist covering France, said in a webinar on Thursday.
Election uncertainty clouds bond outlook
Falling energy prices could ease pressure on interest rates and support bonds across Europe. France may not benefit as much, however, if investors continue to focus on its public finances and political instability.
Hilmer warned the European Central Bank could be reluctant to intervene if French yields rise because of concerns about the country’s finances rather than broader market dysfunction. He wrote that “French spreads may widen further over the coming year.”
Capital Economics forecasts the gap between French and German bond yields could widen from around 140 basis points to 200 basis points by the end of 2027, even as similar gaps narrow for most other eurozone countries.
Source: finance.yahoo.com
