French-German debt spread tops 150 basis points as French budget worries grow
EWG•The 10-year French-German debt spread rose above 150 basis points for the first time since 2011, as investors worried France may struggle to pass its budget and contain the deficit at 6.5%. The euro fell near an 18-month low against the dollar, while markets reduced expectations for another European Central Bank rate hike this year.
1. French debt premium widens
The spread between French and German 10-year government bonds climbed above 150 basis points on Friday, its highest level since the 2011 euro sovereign debt crisis. Markets are concerned the French government may not pass its annual budget, potentially allowing the deficit to reach 6.5%.
2. Political and market pressures
With a divisive presidential election due in April, spending cuts needed to keep the budget in check appear difficult, and either a far-right or far-left candidate could win. The euro fell near an 18-month low against the dollar on Monday as markets scaled back the chances of another European Central Bank rate hike by year-end. Traders will watch whether borrowing-cost spreads in other euro-area countries widen.
3. Other market developments
French bank stocks have been under pressure, while broader European equities have held up, possibly helped by the weaker euro and reduced rate-hike expectations. In the United States, payrolls rose by 29,000 in September, less than forecast, and the report lowered the chance of another Federal Reserve rate hike this month to around 20%.
