The markets have been responsible this year for making it clear that the situation in France is worrying. It is not that the French country is close to default, or on the verge of economic collapse, but its deficit commitments with its European neighbors are not going to be met, and even the less demanding goals that Paris has set in recent Budgets are questioned by analysts and large rating agencies. Where there does seem to be collapse, or at least chaos, is on the political front, with Macron’s government suffering a turn in the last European and legislative elections, and now, with a weak executive that faces a real danger of implosion . Everything is affecting France’s risk premium, which this week reached its highest levels since the euro crisis.
This Friday Standard and Poor’s reviews the rating of the French debt, and everything indicates that, at the very least, the outlook for the French bond will worsen this time, due to the doubts generated by Barnier’s budget plan and the non-compliance with the rules of Brussels deficit. It is a move that follows what Fitch and Moody’s have already carried out throughout the year, decisions that have contributed to worsening the situation of French assets in the market.
The stock market, for example, has suffered a fall of 4.9% so far this year, a decline that contrasts with the rises of the rest of the large European stock markets: the EuroStoxx is up 5.1%, the German Dax is up 16% and the Ibex 35 15% from the first day of the year. Bonds also suffer the consequences of the loss of confidence of rating agencies and analysts, with an increase of 40 basis points in the yield of the French bond in 2024, an increase that collides with the decrease of 33 basis points of the title Italian, of the 12.5 basis points of fall for the Spanish bond, or of the increase of 11 basis points of the German, which is also suffering from the recession in the leading European economy. The increase in the yield of the French bond has reached the point that, this Thursday, it has reached the Greek bond in yield to maturity.
Why can they overthrow the government?
To understand the origin of this whole situation, we must go back to the beginning of this year, when France’s public accounts came to be in the eye of the hurricane. Despite the large deficit, up to 5.5%, that existed in the country, Macron’s figure calmed the markets because he had already expressed his willingness to cut public spending to return that gap between income and expenses to below 3%. .
However, on June 6, the European elections made it clear that he had lost social support and confirmed the rise of Marine le Pen to his right and Jean Luque Melenchon to his left, leading two political forces that agreed on the need for measures. that will increase public spending or cut income (with tax cuts).
Faced with this situation, Macron called a legislative session in which it seemed that he had few options while there were important consequences in the markets with the yield of the bond jumping sharply. All analysts agreed that “political polarization” would prevent unpopular measures from being taken in favor of cleaning up public accounts. At the beginning of July, Emmanuel Macron’s party came second, with 168 seats for Ensemble compared to 182 for the Popular Front. However, Marine Le Pen won 143 seats. With this distribution, sufficient resources were achieved for a minimum government.
On September 5, Macron appointed the tough-tongued former Brexit negotiator Michel Barnier as prime minister, whose mandate was to generate sufficient consensus. The idea from the Elysée is that during the last three months a sufficient consensus could be achieved with which to survive. However, that possibility began to fall as a result of the budgets presented on October 10.
What budgets did Barnier propose?
Michel Barnier presented budgets whose main focus was a powerful reduction of the deficit of 60 billion euros from the 8% that was contemplated at that time to achieve the 5% objective. Two thirds of this came from savings in public spending of 40,000 million. The other 20,000 came from a series of taxes, particularly on the upper classes and companies that boast greater profits. The French government also announced the idea of scheduling the revaluation of pensions for six months.
These budgets have not been enough to convince the markets that the situation is under control. In recent months, France has seen how the large rating agencies put their finger on the issue, and worsen the prospects for its rating. Moody’s was the last to do so, on October 25, alleging, as Fitch did before, that They do not believe that the 5% deficit objective will be achieved. The American bank Citi agrees with the analyzes of the large agencies, and points to a 5.4% deficit, a figure that will even “require great efforts,” in Citi’s opinion. Thus, Barnier’s assumptions have been questioned practically since his birth.
Why does Le Pen want to overthrow the government?
Until the start of this week, Barnier was negotiating concessions with Le Pen to get her to vote in favor of the budget. However, everything seems to have blown up between Tuesday and Wednesday. Marine Le Pen spoke openly that, as these budgets were now proposed, they are “bad, unfair and violent.”
The main reason is that he does not agree with the new taxes and the spending cuts. He has been especially emphatic about the electricity tax, which is budgeted to increase from 22 euros per megawatt hour to figures higher than the era prior to the energy crisis due to Russia’s invasion of Ukraine (32 euros). Barnier hopes that this renewed tribute will raise 3 billion euros.
According to Le Pen “these budgets do not take into account the concerns of the French about the cost of living.” The French politician continued at a press conference claiming that “we will not accept that the purchasing power of the French is affected again. It is a red line and, if it is crossed, we will vote on a motion of censure.”
In that sense The left led by Melenchon has been openly talking about a motion of censure since Barnier’s appointment. “The cast of Macron’s new disaster movie has already been known, now we will have to get rid of them as soon as possible,” commented the leader on X, former Twitter, after learning of the new position.
The deadlines for the collapse
In that sense, although Le Pen did not propose the motion of censure but simply voted against the budgets, she did clearly activate this option in response to Barnier’s desire to use article 49.3 of the French constitution, which allows budgets to be approved without need for voting.
The process is quite clear. In the coming weeks, the budget that is now in the Senate will be voted on on December 12 and must be approved before the 21st. If it does not get enough votes, it will have to activate the aforementioned article. However, activating this mechanism allows the parties in the chamber to respond with a motion of censure if they join forces. The Popular Front has already announced that it will activate this clause and Marine Le Pen has specifically said that she would support it if that scenario is reached.
It all depends on whether in the coming days an agreement can be reached ‘in extremis’ or whether the National Group ends up accepting them or at least allowing them to be approved with the rejection of the chamber rejecting the motion of censure. All options that seem distant right now, but how possible is an agreement?
Possible pact? Le Pen’s bluff?
At the moment the two positions seem very far apart. The president of the National Rally, 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. “Barnier’s budgetary logic is not going to change by touching small things, what we ask for the budgets to go ahead is a political break with Macron’s line, something that has not happened.”
However, the French Government has already mentioned the possibility. The French Finance Minister, Antoine Armand, in the midst of an ultimatum of a possible motion of censure if the budgets fall, has announced that he is willing to make concessions to avoid this scenario. “It is better to have a budget that is not exactly what we want or not to have a budget at all. Otherwise we enter the unknown”he explained during an interview with RMC.
For its part, a possible retreat by Marine Le Pen is something that has defenders among the main analysts. From ING they comment that “we do not believe that he will follow through with his threats to overthrow the government in the short term, but he does remind the markets of the precarious situation in which the country finds itself.” A vote of no confidence “would jeopardize the progress made with the current budget proposal and trigger a new period of political limbo. But, with new parliamentary elections unable to be held until mid-2025, the timing for such a move seems excessive”.
What happens to the markets and what will happen if the government implodes?
It is difficult to speculate on the reaction that the markets may have in one scenario or another, but there are analysts who already draw the future behavior of some assets depending on how the political and economic situation in France develops. The first thing that France will have to deal with is, this Friday, the review of Standard & Poor’s rating, an event that may have an impact on the bond price depending on what the agency decides and publishes.
France’s problem, as Philippe Waechter, chief economist at Ostum AM, explains, is that “the role and status of France are today under discussion”, and points out how “it lacks dynamism and a clear compass on its industrial orientations”, furthermore of “a distrust of foreign companies” that could be transmitted to French ones, and a rejection of investors who “do not wish to take risks in French assets,” they highlight.
François Rimeu, senior strategist at Crédit Mutuel AM, highlights two different scenarios that will affect French assets in different ways. The first, that Barnier’s government falls, a possibility to which they give a 50% probability. “In this scenario, it seems likely that the French bond spread against the Bund will initially increase to 95-100 basis points, and that French equities will underperform other European indices by between 2% and 3%. %”.
The second scenario, “in which the Barnier government would survive a vote of no confidence, would produce a general sense of relief and therefore a rally in the French markets. A return to around 70 basis points in the spread seems possible with the Bund, as well as a slight rebound in French equities, around 1% or 2%” explains Rimeu.
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