After the chaos that the legislative elections in France brought to the debt markets, which led to the bonds of this country already having a higher yield than that of Spain, this Wednesday another milestone was achieved that seemed unattainable. The risk premium (difference between French and German bonds) has reached the highest point since 2012when the euro crisis was still at its peak. At the start of the day it already reached 89 basis points.
These movements come after a tireless rise that has occurred throughout the month of November, Well, on the 13th of this month it reached 72 points and, since then, it has not seen relegations again. Behind these movements is political chaos again and this time the risks are even greater than in the legislative elections. Marine Le Pen has promised that she would bring down the government if it does not meet the demands presented in an ultimatum that could break out in December. Since then, more and more media and politicians assume that far-right politics will carry out its threat, leading the country into political chaos and aggravating the problems that it has already generated in the financial markets.
Although Le Pen has been threatening to make this decision for some time, the reality is that the process has entered a new phase since yesterday afternoon. At that time the Senate began the examination of the national budget that had already been rejected by the National Assembly (the equivalent of Congress).
At that time, the president of the National Group, Sebastien Chenu, stated that “clear conditions are being created for a motion” of censure, while several deputies called for Macron’s resignation if the accounts did not go ahead. “Bernier’s budget logic will not change Touching on small things, what we ask for the budgets to go ahead is a political break with Macron’s line, something that has not happened.
Now the process points to December, where it is expected that, in the absence of an agreement, the ruling party will try use article 49.3 of the Constitution French to be able to approve the accounts without a vote. Various parties have already stated that this would lead inexorably towards a motion of censure that overthrows the government and takes the country back to the polls.
Bernier himself, the country’s prime minister, came to the fore to defend the need to vote on the text and said that the country would face a “financial storm” whether they are not approved or lose power. Many analysts take these words seriously beyond politics given that between the European elections and the legislative elections, France experienced days of chaos with an outbreak of crisis in its bonds that led to doubts about even a possible intervention by the ECB.
“France’s risk premium could exceed Italy’s if the government falls”
This has led Citi Group experts to bet that the risk premium will continue to grow to 100 basis points. For its part, Allianz went even one step further and in a note shared today it said that, in the event that the government falls, they see the French risk premium surpassing even Italy (which is trading at 128 points). ). “We see a situation in which the government is once again in danger“says the German bank. For their part, Commerzbank experts speak of a ‘withdrawal’ of French assets. “The budget agreement is difficult and the macroeconomic outlook is deteriorating rapidly,” the entity commented.
Mirabaud experts point out that this milestone in the debt market is even more relevant given the fragile situation of the German economy, which would also be putting a dent in the title of the ‘locomotive of Europe’. “We must remember that the German economy is contracting” explains the firm. Furthermore, the company’s analysts believe that there is little room for the situation to end successfully.
A latent debt crisis
This would be the new chapter of a debt crisis that has been latent in the country for a long time, but which has clearly manifested itself since June of this year. In 2023 it had closed with a deficit of 5.5% of GDP and a debt that already reaches 112% of its entire economy. Until that moment there was some optimism in the tools that could be provided from the Elysée to put an end to this situation, but the European (and later legislative) elections made it clear to the market that there is no going back.
A fragmented government was proposed where the rise of Marine LePen and the extreme left of Jean Luque Melenchon went through frontal opposition to austerity measures such as cuts in pensions or other items. From Scope Rating they then comment that the panorama of a fragmented politics “will limit your ability to address your problems and clean up your finances.” This is added to a fragile economy with the industry in decline, demographic problems and structural expenses that are projected to be increasingly relevant.
In the second round the ruling party managed to win (in a minority) and thus contain the worst possible blow, calming the markets. However, the crisis was still present and the presentation of the budgets (which are now rejected due to their austerity) lit the fuse because it made it clear that they would not be taken measures to strengthen the country’s finances. In those days Spanish debt yields fell behind the French ones in a historic turn in the debt markets. Proof that no changes in the situation are expected is in the European Commission’s own forecasts, which point to a new deficit of 6.2% for 2024 and 5.3% for 2025. All this without taking into account an implosion of the Current government.
Consequently, Capital Economics commented that “We anticipate that the government will have difficulties to pass a budget that will substantially reduce the deficit next year and, as a result, we believe that the spread between French and German government bonds is likely to continue to widen in the coming weeks and months.” If France’s situation continues to worsen, the consequences could be for the entire euro zone since it represents 17.2% of the entire economy of the region. So Paris could be the scene of a crisis in the financial markets that will have its echo throughout the continent.
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