Investors dump French debt as political crisis grows #FrenchFinance

Investors are dumping French debt in favour of Spanish and even Italian bonds as the deepening political crisis in Paris scares off money managers.

Fund managers at JP Morgan Asset Management said a “slow moving deterioration” in the country’s debt dynamics meant there was no end in sight for the country’s high borrowing.

Prime minister Michel Barnier resigned last week after losing a no-confidence vote over the country’s deficit-cutting budget. It was the first time a French government had been voted down by parliament in more than 60 years, piling pressure on President Emmanuel Macron.

The collapse of the government is fuelling fears in the market about the state of France’s public finances and the Elysee’s failure to get a grip on the problem.

Seamus MacGorain at JP Morgan Asset Management, which oversees $3.3 trillion of investments, said: “For a long time, people bought French bonds as a slightly higher yielding alternative to Germany, thinking that the credit quality was very high. But the credit quality has deteriorated.

“Broadly speaking, we think that Spain and Italy are better to own than France.”

The situation is a remarkable reversal of fortunes compared with a decade ago when investors were speculating that Spain and Italy could need bail-outs.

Mr MacGorain’s assessment comes after the gap between France and Germany’s borrowing costs widened to its biggest level since the eurozone debt crisis last week.

Official data show foreign investors have steadily been pulling money out of France in recent months. Japanese investors alone pulled €12bn (£10bn) out of French bonds in the three months following Mr Macron’s decision to call the snap election this summer, ploughing the money instead into Germany, Italy, and even the UK.

Alex Everett, investment manager at Abrdn, who runs a multi-billion pound bond portfolio, said he was also buying Spanish debt over French bonds.

“It’s been very clear for quite some time that there’s been overspending alongside insufficient growth. And so if the government cannot get together to find some kind of agreement, it’s really consigning the country to at least another eight or nine months of inaction. And that’s not really a suitable outlook when you’ve got a country where debt is already very high.”

Data to the end of October also show that domestic banks are beginning to shun their own government’s bonds, with purchases by French banks falling from €33bn in the first half of the year to €5bn in the four months following the summer election.

More recent data compiled by BNY Mellon, the world’s biggest custodian bank, showed “extremely aggressive” selling continued in November, although last week saw inflows after weeks of volatility.

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