Smouldering debt risk haunts French markets: Mike Dolan
TLT•France’s budget and political crises are pushing borrowing costs higher as the country faces weak growth and prolonged uncertainty. The deficit could reach 6.4% of GDP if budget negotiations fail, while debt-servicing costs may rise to 4% of GDP by 2030.
1. Budget and debt pressures
A divided French parliament is struggling to pass the annual budget plan needed to contain the deficit and debt. Goldman Sachs estimates the budget gap could reach 6.4% of GDP if negotiations continue into December; even if the government passes its €54 billion savings package, the deficit is expected to remain at 5% of GDP or more for a third consecutive year, with debt rising above 120% of GDP.
2. Borrowing costs climb
French 10-year borrowing costs have risen almost 1.4 percentage points since midyear, and the spread over German bonds has widened to more than 150 basis points. Higher rates could push annual debt-servicing costs from 2.2% of GDP last year to 4% by 2030. French stocks have fallen 10% over two months, while credit default swaps imply a rating four notches below the country’s current single-A rating.
3. Political uncertainty persists
Street unrest and political divisions add to uncertainty ahead of April’s presidential election, with a possible parliamentary election in June after the presidential vote. The article says France may not have a clear picture of its political and budget outlook for at least another eight months.
