Smouldering debt risk haunts French markets
TLT•France’s budget and political crises are driving borrowing costs higher as the government struggles to pass a budget. The deficit could reach 6.4% of GDP, while debt-servicing costs may rise to 4% of GDP by 2030.
1. Budget and growth pressures
France’s divided parliament is struggling to pass an annual budget, as political unrest compounds a fiscal problem that has been building for at least a year. Estimates based on past unrest suggest the initial GDP hit could be 0.1 to 0.2 percentage points, against annual growth of about 0.5%.
2. Deficit and borrowing costs
Goldman Sachs estimates the annual budget deficit could reach 6.4% of GDP if negotiations extend into December. Even if the government passes its €54 billion savings package, the deficit would remain at 5% of GDP or more for a third year, with debt expected to exceed 120% of GDP. French 10-year borrowing costs have risen nearly 1.4 percentage points since midyear, and annual debt-servicing costs could increase from 2.2% of GDP last year to 4% by 2030.
3. Political uncertainty persists
French stocks have fallen 10% over two months, while credit default swaps imply a sovereign rating four notches below France’s current single-A rating. The article says the presidential election is expected in April, with a possible snap parliamentary election in June; candidates’ positions on budget control may be important to investors.
