People walk along the Chatelet Les Halles area of Paris during the snowfall of Storm Caetano.
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France’s brewing political crisis is spilling into financial markets with the country’s borrowing costs hitting the same level as debt-ridden Greece’s for the first time on record Thursday.
The spread — the difference in yield between two bonds — between French 10-year government bond yields and their Greek counterparts was reduced to zero earlier Thursday. The yield on the French 10-year stood at 3.0010% while the same Greek bond stood at 3.030%.
Investors demanding the same interest for holding French debt as they would for holding that of peripheral and debt-ridden economy Greece shows the extent of concerns over political turmoil in France as the government, led by Prime Minister Michel Barnier, struggles to get support for its 2025 budget that aims to cut spending and raise taxes to curb France’s yawning budget deficit.
As it stands, the left-wing New Popular Front alliance has said it will table a vote of no confidence in the government if Barnier tries to force through the budget, which envisages 60 billion euros ($63.3 billion) worth of tax hikes and spending cuts.
The far-right National Rally has threatened to support the left in the no-confidence vote, a move that would bring down the government and plunge France into further political and economic uncertainty.
New elections cannot be held until next June, twelve months on from the last parliamentary elections that saw both the far-left and far-right perform well in the first and second round of the vote but both failing to win a majority of the seats. As such, following the election, President Emmanuel Macron put conservative Barnier in charge of a minority government following the election.
French officials looked to defend the economy on Thursday, but acknowledged that bond investors viewing French debt as risky as Greece’s was a worrying development. Economy Minister Antoine Armand said Thursday that the French economy could not be compared with Greece’s, however.
“France is not Greece, France has an economy, an employment situation, economic activity and attractiveness, and economic and demographic power that are far superior, that means we’re unlike Greece,” Armand told French broadcaster BFM TV, in comments translated by Google. He also praised Greece and other peripheral European economies for having “pulled up their sleeves” and making savings.
Jason Da Silva, director of Global Investment Strategy at Arbuthnot, said political upheaval in France was bound to “cause ripples across European investing” but said it could spur French lawmakers into action.
“Hopefully this spurs on a little bit more impetus from the political leaders in Europe to think about what’s going to lead to growth going forward … sometimes you need to take a bit of pain from the market to really get the political leaders to know what’s needed to grow the economy, particularly with [potential trade] tariffs coming through,” he told CNBC’s Street Signs on Thursday.
Commenting on the parity in French and Greek government bond yields, Rabobank said in analysis Thursday that “if far right leader Marine le Pen backs a no confidence vote in the coming days or weeks, Barnier could even be out of power.”
The bank also noted that the spread between the 10-year yields of Greece and France climbed above 30 basis points at the height of the Greek debt crisis in 2012, but has been gradually declining since 2016.
Greece recovering
While nowhere near the level of crisis experienced by Greece in the wake of the global financial crash of 2007-2008, France’s economy is seen to be in need of urgent attention; it’s budget deficit is expected to stand at 6.1% in 2024 and public debt topped 110% of GDP in 2023. Countries within the EU are obliged to keep their budget deficits within 3% of gross domestic product and their public debt within 60% of GDP.
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Greece experienced the euro zone’s largest sovereign debt crisis in the wake of the global crash in the late noughties, pushing the country into international bailouts that forced it to implement painful austerity measures and reforms. The country has since been praised for making progress on getting its economy back on track and reducing its debt.
Greece is expected to grow 2.1% in 2024, according to the European Commission, which noted in November that Greece’s “public debt-to-GDP ratio has been declining over recent years and is projected to reach 153.1% in 2024, before falling further to 146.8% of GDP in 2025 and 142.7% in 2026.”
The decline is driven by primary surpluses, nominal growth and the lowering of cash buffers in 2024, it said.