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France’s finance minister has warned the country could face a debt crisis similar to the turmoil in Britain’s market under former prime minister Liz Truss if the far-right Rassemblement National wins snap elections this month and next.
In a sign of market nerves, French government bonds have sold off sharply since President Emmanuel Macron’s shock announcement on Sunday that he would dissolve parliament and call new elections after his party was defeated by the far right in European elections.
The sell-off pushed the gap between French and German borrowing costs to its highest level since October. The cost of some French debt maturities has also risen above that of Portugal, which defaulted during the eurozone crisis and had a substandard credit rating for most of the past decade.
“If the RN implements its program, a debt crisis is possible. A Liz Truss-style scenario is possible,” Finance Minister Bruno Le Maire told local party leaders on Tuesday night.
The crisis erupted in the UK bond market in 2022 when Truss brought forward a budget that would implement tens of billions of pounds worth of unfunded tax cuts. Truss was forced to resign after just 44 days in office, but not before the crisis knocked hundreds of billions of pounds off the value of Britain’s pension systems.
Le Maire warned that France “simply [does] they don’t have the means to finance it [RN leader] Marine Le Pen’s additional tens of billions of euros in costs associated with the party’s agenda to cut sales taxes and lower the retirement age. RN did not immediately respond to a request for comment.
Yields on France’s benchmark 10-year bond rose as much as 0.22 percentage point to more than 3.33 percent at one stage on Monday and Tuesday, pushing the premium over France’s borrowing costs to 0.62 percentage point.
French bonds later partially reversed losses to trade up 3.25 percent on Wednesday. But investors remain concerned that if RN takes over or shares power, its plans for tens of billions of euros more in public spending could prevent any improvement in the country’s gaping budget deficit.
French central bank governor François Villeroy de Galhau warned on Wednesday that the country needs to clarify its spending trajectory as soon as possible.
“It will be important that regardless of the outcome of the vote, France can quickly clarify its economic strategy and especially its budgetary strategy,” he told Radio Classique on Wednesday morning. “Election period is always accompanied by uncertainty. . . but investors don’t like uncertainty.”
This week’s big sell-off in French bonds follows S&P’s decision to downgrade France’s debt to double A-minus at the end of May, pouring cold water on the French government’s efforts to improve its public finances.
“When you look at French debt metrics, the deficit is a problem and I think combined with the political uncertainty it’s no surprise that spreads have widened,” said Andrew Balls, chief investment officer for global fixed income at bond giant Pimco. Markets were “appropriately pricing the risk”.
France’s budget deficit was well above the target of 5.5 percent last year, putting France on the EU’s excessive deficit procedure list. Under new EU rules that come into effect next year, France will have to reduce its structural deficit by 0.5 percent a year until the overall deficit falls below 3 percent.
The government has also pledged to reduce the deficit below 3% by 2027. Cedric Gemehl, an analyst at Gavekal Research, said the plans “didn’t look credible at the start” and “even less so now”, adding that “further downgrades look likely”.
Jason Davis, global rates portfolio manager at JPMorgan Asset Management, said he has been underweighting French government bonds for some time. “The snap election raises uncertainty about the trajectory of France’s fiscal sustainability and subsequent credit rating,” he said.
Still, the selloff in French bonds remains more muted than in 2017, when Le Pen came second in the first round of French presidential voting, pushing the spread in borrowing costs between the euro zone’s second-largest economy and Germany to 0.8 percentage point.
Since 2017, Le Pen has rowed back on her plans to withdraw France from the EU. Analysts said the spread widening should be less intense this time around in the coming months, but warned that France’s presidential election in 2027 could pose a greater risk to markets if Le Pen remains far ahead in the polls.
“In short, the key question for markets is the possible fiscal consequences of a Le Pen majority rather than existential ones such as a potential Brexit,” said Meera Chandan, global FX strategist at JPMorgan Chase.
More news from Kate Duguid in New York