France’s Political Crisis Spills into Financial Markets
France’s brewing political crisis has spilled into financial markets, with the country’s borrowing costs reaching levels similar to those of debt-ridden Greece. For the first time on record, the spread between French and Greek 10-year government bond yields narrowed to zero, reflecting investor concerns over the political turmoil in France.
The French government, led by Prime Minister Michel Barnier, is struggling to pass its 2025 budget, which aims to cut spending and raise taxes to curb France’s yawning budget deficit. The left-wing New Popular Front alliance has threatened to table a vote of no confidence in the government if Barnier attempts to force through the budget, while the far-right National Rally has said it would support the left in the no-confidence vote, which could bring down the government.
France’s economy is under pressure, with a budget deficit expected to stand at 6.1% in 2024 and public debt topping 110% of GDP in 2023. The country’s senior officials have argued that France is not comparable to Greece, which has a smaller economy and has been through a long and difficult recovery from its debt crisis. However, investors are increasingly viewing French debt as a risk, driving up its borrowing costs to levels similar to those of Greece.
The situation is expected to “cause ripples across European investing,” according to Jason Da Silva, director of Global Investment Strategy at Arbuthnot. However, the crisis may also prompt French lawmakers to take action to address the country’s economic challenges.
Rabobank has warned that if the far-right leader Marine le Pen backs a no-confidence vote, Prime Minister Barnier could lose power. The bank also notes that the spread between the 10-year yields of Greece and France has been gradually declining since 2016, dropping below 30 basis points during the height of the Greek debt crisis in 2012.
