France joins Eurozone’s ‘periphery’ as turmoil deepens, say investors

{"text":[[{"start":11.18,"text":"France has joined the club of riskier borrowers on the Eurozone’s “periphery”, big investors say, as political turmoil undermines efforts to confront the country’s soaring debt."}],[{"start":24.16,"text":"French Prime Minister François Bayrou lost a crucial confidence vote on his deficit-cutting budget efforts on Monday, bringing down his government and worsening a crisis that has already pushed Paris’s borrowing costs close to their highest level since the Eurozone debt crisis."}],[{"start":42.89,"text":"At 3.47 per cent, France’s benchmark 10-year borrowing costs are above those of longtime Eurozone troubled borrower Greece at 3.37 per cent, and closing in on Italy at 3.51 per cent, two of the borrowers long deemed riskier by global investors."}],[{"start":65.03999999999999,"text":"“France is the new periphery,” said Kevin Thozet, a member of the investment committee at French asset manager Carmignac."}],[{"start":73.63,"text":"Bayrou officially resigned on Tuesday, leaving him in caretaker mode and piling pressure on President Emmanuel Macron to try and find a replacement who can survive long enough in a hung parliament to pass next year’s budget."}],[{"start":90.71,"text":"The additional interest rate paid on France’s 10-year bonds over benchmark German Bunds — a measure of the additional borrowing costs investors are demanding to lend to Paris — rose back to 0.8 percentage points, as nerves continued over the economic outlook."}],[{"start":null,"text":"

France’s 10-year borrowing costs are among the highest in Europe

Country	10-year borrowing cost (%)
US	4.08
UK	4.62
Germany	2.66
France	3.47
Italy	3.51
Greece	3.37
Spain	3.24

"}],[{"start":109.35999999999999,"text":"That extra risk premium paid on French government bonds is becoming “the new normal”, said Thozet. Europe is moving at “different speeds . . . France is in the slow lane, Germany and southern Europe are accelerating.”"}],[{"start":125.13999999999999,"text":"Bayrou’s exit leaves Macron with a narrowing set of options to find a viable replacement, but looming social unrest and market jitters mean he may have to act fast. The Élysée Palace says he will name a new premier in the coming days."}],[{"start":142.32999999999998,"text":"Bayrou’s plans, including the unpopular idea of scrapping two days of national holiday, sought to begin to narrow France’s deficit to 4.6 per cent of GDP next year from 5.4 per cent by the end of 2025. His proposals will now be set aside and his successor will be tasked with crafting a new 2026 fiscal package, which is almost certain to be watered down in an effort to convince the opposition to abstain and let it pass."}],[{"start":177.07,"text":"France’s debt-to-GDP ratio expanded to 113 per cent last year, according to Eurostat, up from 101 per cent in 2017 when Macron began his presidency. It is expected to reach 118 per cent by 2026. Rating agency Moody’s downgraded the country’s credit rating in December."}],[{"start":202.51,"text":"Rivals S&P Global and Fitch have it on a negative outlook, with Fitch set to issue its latest review of the rating on Friday."}],[{"start":null,"text":"

"}],[{"start":213.95,"text":"Fund managers said that even with Bayrou’s departure, the make-up of France’s parliament meant there is little support for any budget consolidation and that the political stalemate could continue until the 2027 presidential elections."}],[{"start":229.44,"text":"“France is going to be a problem child for the bond markets for the next 18 months,” said David Zahn, head of European fixed income at Franklin Templeton, adding that he expected to see “continuing volatility” in the French bond market."}],[{"start":246.07999999999998,"text":"Maya Bhandari, Emea multi-asset chief investment officer at Neuberger Berman, said “fiscal slippage seems to be the message” in any likely political scenario. “It’s difficult to see a positive outcome.”"}],[{"start":261.31,"text":"During the Eurozone sovereign debt crisis that began a decade and a half ago, investors divided member states into safe “core” borrowers and the risky “periphery”, where bond yields shot to unsustainable levels, triggering bailouts and forcing the European Central Bank to provide a market backstop."}],[{"start":282.34000000000003,"text":"France has long been seen as close to Germany, if not as safe a bet as the bloc’s biggest economy and longtime reluctant borrower, with Paris dubbed “semi-core” by investors."}],[{"start":295.04,"text":"However, this year has seen a dramatic rally in the debt of traditional “peripheral” borrowers. That has helped shift investors’ perception of the relative riskiness of French debt, even though Paris’s borrowing costs remain far below the heights reached by “periphery” countries during the debt crisis."}],[{"start":316.43,"text":"“What we are seeing today is a slow migration of France into the periphery category, unless fiscal policy is adjusted soon,” said Tomasz Wieladek, chief European macro strategist at T Rowe Price."}],[{"start":null,"text":""}],[{"start":330.33,"text":"Protests and walkouts are expected across the country on Wednesday, as citizens hit out at proposed spending cuts and against Macron himself. Carmignac’s Thozet said that serious social unrest could put further upward pressure on bond yields."}],[{"start":346.65999999999997,"text":"French stocks, too, have lagged behind this year, while much of the continent has enjoyed rallying equity markets."}],[{"start":355.48999999999995,"text":"“The lack of clarity on the path ahead, and worsening fiscal dynamics, mean the risk premium on French bonds and domestic equities is unlikely to fall materially soon,” said Emmanuel Cau, head of European equities strategy at Barclays."}],[{"start":374.42999999999995,"text":"Additional reporting by Sarah White"}],[{"start":386.46999999999997,"text":""}]],"url":"https://audio.ftmailbox.cn/album/a_1757462335_1144.mp3"}