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(Bloomberg) — A gauge of French bond risk surged to its highest in a month as markets fret about the country’s budget negotiations and a looming review of its sovereign rating.
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The premium investors demand to hold France’s debt over regional haven Germany has climbed every day this week and is set to close at the highest since early October. That puts it back near the 80 basis-point level breached when a snap election called in June sparked months of political uncertainty.
The latest moves reflect worries over whether far-right leader Marine Le Pen could back a no-confidence motion that would topple Michel Barnier’s government and derail its 2025 budget plans. On top of that, the country sold more bonds on Thursday and its heavy debt burden will face scrutiny at the end of the month from S&P Global Ratings.
“It seems to me that supply, Le Pen headlines, S&P around the end of the month and risk-off is all a bit of a toxic mix for OATs,” said Evelyne Gomez-Liechti, a strategist at Mizuho International Plc, referring to the market term for French government bonds.
The selloff in French debt is being compounded by market-wide risk aversion as the war in Ukraine reaches a dangerous new phase. That’s also hurt other lower-rated euro-area peers such as Italy, though its debt-risk gauge remains near the narrowest this year.
For France, a vote of no confidence to block the budget and bring down Barnier’s government would be catastrophic for its public finances after efforts to contain the deficit already slipped off course this year. Last month, both Fitch Ratings and Moody’s Ratings put a negative outlook on France, and Scope downgraded it.
The current budget plans look set to win approval from the European Union, though the bloc’s executive arm is still seeking more clarity on certain reforms. The initial version presented last month to parliament promised €60 billion ($63.1 billion) of tax increases and spending cuts to bring the gap back to 5% of economic output from an expected 6.1% this year.
Nicolas Forest, chief investment officer at Candriam, said the recent widening in French bond spreads, though modest, shows the market “is doing its job” as the process reaches its final stages.
“The water is simmering, not boiling, yet,” he said in an interview. “There’s a stage at which it’s normal for investors to take into account the possibility that the government won’t make it til the end of the year, in which case the uncertainty would be total.”