France has become the ‘sick’ of Europe in recent months, and the premium it maintains with the Eurobond is a good indicator of the fever levels maintained by the second largest economy in the euro zone. The Government is not being able to fix the debt problem that the country has, and organizations, such as rating agencies or large analysis houses, do not stop succeeding, which question, or openly acknowledge that they do not believe in compliance. of the objectives that the country has set for next year. In a few months, The market is putting the French bond at levels that suggest investor distrustand not only because of the differential it maintains with the German bond: in summer, the Eurobonds were trading at practically the same level as the French bond, but the premium of the latter compared to the European reference continues to widen, and has just touched the 0.25 points.
At the beginning of June, when the Eurobond was trading at around 3.01% average yield to maturity, the reference French bond was moving at practically the same level. However, it was then, in mid-June, that the spread began to widen, a process that has continued until now The premium has reached 25 basis points for the first time in history.
In October, the French government tried to reassure the markets with several messages that assured that the situation would improve over the years. The first communication was the recognition that they are obliged to delay the moment in which they will be able to reach the deficit ceiling, at 3%. The goal was set for 2027, but has now been moved to 2029, as acknowledged by Prime Minister Michel Barnier.
The effort that France must make is not small. After maintaining a deficit forecast of 6% for this year, and delaying the 3% objective, required by the euro zone, until 2029, the administration now maintains the objective of closing the year 2025 with a deficit of 5%, a data that has been increasing in recent months, since in April the level that was in focus was 4.1%.
To do this, France depends on a public spending cut plan of 60 billion euros by 2025, as Barnier himself announced in October, a figure aimed at achieving the new deficit objective. Two-thirds of this cut will come from reducing spending on ministries, local authorities and social security, while another 20 billion euros will come from “temporary” tax increases on the richest citizens and also on large corporations. companies.
With these ambitious spending cuts on the table, France has announced plans to issue 300 billion euros in the market next year, up from 285 billion in 2024. However, there are analysts, such as Société Générale, Danske Bank or Citigroup, who expect that the country will have to issue even more, due to the large amount of debt that will mature next year. What is representative of the problems that the economy of the French State has is that the figure of emissions has grown by almost 100,000 million euros for one year, compared to those carried out before the pandemic, just 5 years ago. And while the rest of Europe is already in the process of cutting sovereign debt issues, France is devoting all its efforts to preventing issues from ending up being much higher than expected, something that financial markets are picking up on, and the bond discounted in its price and profitability at maturity.
Serious doubts about the Government’s plans
What the markets are making clear in recent weeks is that there are reasonable doubts about these figures announced by the French authorities. Moody’s, for example, made them public at the end of October, when it cut the outlook for the French debt rating, noting how it is “unlikely that the government will be able to implement measures to sustain further increases in deficits and a deterioration in the capacity of pay their debts.” Furthermore, Moody’s recalled then that “the fiscal deterioration we have already seen is greater than we expected.”
The government’s credibility in terms of its ability to manage increasingly unsustainable debt is clearly in doubt, and the agency highlights how there is now “a political and institutional context that does not lead us to expect measures that will improve the budget balance.” We must remember, for example, the massive protests that have occurred in France in recent years when attempts have been made to push through tax increases or spending cuts, and which have prevented the Government from carrying out its adjustment plans.
Citi confirms that “we agree with Moody’s concern,” and openly says that “he does not believe that the 5% deficit target will be reached this year. We expect 5.4%, and even this figure will require a considerable effort”and believes that Moody’s notice is a preliminary step to a rating cut that will arrive in the coming months. The next test that French debt will have to pass is on November 29, when S&P will review the rating, and there is also expected to be, at a minimum, a deterioration in the outlook for the rating.
Japanese investors flee France for Germany
Not only large analysis or rating houses are calling into question Paris’ plans regarding debt management. Japanese investors, large holders of European (and the rest of the world) sovereign debt, are making it clear with their latest movements that they do not trust that French bonds will perform well in the medium term. In September, the Japanese bought the largest amount of German sovereign debt since 2018: $5.6 billion in a single month.
At the same time, Japanese funds sold French bonds for the fifth consecutive month, the longest streak seen since 2022. Now it is key for the Government to get its budgets approved in Parliament in December, to try to contain the increase in the French risk premium compared to the German one, and the one it maintains with Eurobonds, increasingly higher.
Enrique Lluva, director of fixed income at Imantia Capital, explains the importance of Japanese investors for the fixed income market. “57% of French debt is in the hands of foreign investors, and a good part of them are Japanese. They have been buying France thinking they were buying Germany, and they have finally realized that is not the case, and they are reversing the movement. And if most of your debt holders are foreigners, if you make a large issue, and the European Central Bank is no longer there to buy everything, France is going to need to find new clients. And that is done by price; There is no other way: paying more”, explains Lluva. This is not good news for the prospects of the French risk premium in the future.
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