Bond investors likely to spare France from financial “storm” as government teeters on brink of collapse
By Yoruk Bahceli and Leigh Thomas
London and Paris – Despite Prime Minister Michel Barnier’s warning of a financial “storm”, bond investors are expected to spare France from a crisis as the country’s government teeters on the brink of collapse. The government is likely to fall as early as Wednesday after a dispute over its 60 billion-euro budget aimed at curbing a budget deficit double the European Union’s limit.
The euro zone’s second-largest economy briefly paid higher yields on its government bonds on Monday, with its crisis-hit risk premium over Germany reaching 90 basis points, the highest since 2012. This has renewed talk of the return of bond vigilantes, who demand higher returns from governments they perceive as fiscally reckless. However, big investors see the current upheaval as the next episode in a long-winded reckoning, rather than a budget-driven market meltdown.
“This is a slow-burning crisis which will lead to an ongoing widening of spreads and an ongoing deterioration of sovereign creditworthiness,” said Christian Kopf, head of fixed income and FX at Union Investment. “But for the time being, I do not see the ingredients for this to totally get out of hand and morph into an outright sovereign debt crisis.”