French Borrowing Costs Match Those of Greece for First Time, Citing Shift in Lenders’ View of Euro Zone Creditworthiness
LONDON (Reuters) – French borrowing costs effectively matched those of Greece on Thursday for the first time, marking a significant shift in how lenders view the creditworthiness of euro zone members. This comes as Michel Barnier’s government teeters on the brink of collapse, with far-right and leftist opposition parties threatening to bring down the government over its budget that includes 60 billion euros ($63 billion) in tax hikes and spending cuts.
“Bond investors worry that the collapse of the government would mean any effort to cut borrowing is jettisoned,” said Michiel Tukker, senior European rates strategist at ING. “A no-confidence vote would reset the progress made with the current budget proposal and trigger a new period of political limbo.”
France’s rising debt levels have eroded its advantages in the bond market for years. In contrast, the countries once at the center of the 2012 crisis, including Portugal, Italy, Greece, and Spain, have made significant progress in cutting their debt levels and have become more attractive to bond investors.
Greece’s public debt was already 100% of GDP before the euro zone crisis and soared to over 200% of GDP during the COVID-19 pandemic. However, it has since fallen to around 160% of GDP, with economists expecting it to continue falling. French debt, on the other hand, is historically elevated at 112% of GDP and rising, reaching 150.6% in Q1 2022, driven by COVID-19 pandemic-related spending and tax receipts.
“Even if the government did achieve its planned consolidation, France would still have a pretty elevated budget deficit,” said Max Kitson, rates strategist at Barclays. “If you look at Greece’s debt-to-GDP profile, you have a downwards trajectory which contrasts with France’s upwards trajectory.”
The shift in lenders’ view of euro zone creditworthiness has seen Ireland, Portugal, and Spain’s borrowing costs fall below those of France, which has not seen a sharp rise in bond yields. The country’s bond yields have actually fallen 16 basis points since the start of the month, and Friday evening will prove a test, when S&P Global Ratings updates its assessment of France, following Fitch and Moody’s downgrades to the country’s outlook last month.