France has become the “sick patient” of Europe in recent months, and the premium it maintains with the Eurobond is a good indicator of the fever maintained by the second economy in the euro zone. The government is unable to resolve the country’s debt problem and organizations, such as rating agencies or large analysis houses, continue to succeed, which calls into question or openly admits that they do not believe in meeting objectives. that the country has set for next year. In a few months, Market places French bond at levels that suggest investor warinessand not only because of the differential it maintains with the German bond: in the summer, the Eurobonds were trading practically at the same level as the French bond, but the premium of the latter compared to the reference European market continues to widen, and has just reached 0.25 points.
At the beginning of June, while the Eurobond was trading around an average actuarial yield of 3.01%, the French benchmark bond was moving practically at the same level. But it was then, in mid-June, that the spread began to widen, a process that has continued to the present. The premium reached 25 basis points for the first time in history.
In October, the French government tried to reassure the markets with several messages assuring that the situation would improve over the years. The first communication was the recognition that they are obliged to delay the moment when they can reach the deficit ceiling, at 3%. The target was set for 2027, but has now been postponed to 2029, as acknowledged by Prime Minister Michel Barnier.
The effort that France must make is not minimal. After maintaining a deficit forecast of 6% for this year and postponing the 3% target required by the euro zone to 2029, the administration now maintains the objective of closing the year 2025 with a deficit of 5%, a data that has increased in recent months, since in April the level that was featured was 4.1%.
To do this, France is relying on a plan to reduce public spending by 60 billion euros by 2025, as Barnier himself announced in October, a figure aimed at reaching the new deficit target . Two thirds of this reduction will come from reduced spending by ministries, local authorities and social security, while a further €20 billion will come from “temporary” tax increases on the richest citizens as well as on large companies.
With these ambitious spending cuts on the table, France has announced its intention to issue 300 billion euros on the market next year, compared to 285 billion in 2024. However, some analysts, such as Société Générale, Danske Bank and Citigroup, expect that the country will have to issue even more, due to the large amount of debt which will mature next year. What is representative of the problems of the French State economy is that the figure for emissions has increased by almost 100 billion euros in one year, compared to those carried out before the pandemic, ago barely 5 years old. And while the rest of Europe is already reducing sovereign debt issuance, France is devoting all its efforts to preventing emissions from ultimately being much higher than expected, which the financial markets are realizing, and the bond is discounted in its prices and profitability at maturity.
Serious doubts about the government’s plans
What markets have made clear in recent weeks is that there are reasonable doubts about the figures announced by French authorities. Moody’s, for example, made them public at the end of October, when it lowered the outlook for the French debt rating, stressing that it is “unlikely that the government will be able to implement measures to support further increases in deficits and deterioration of debt.” the ability to pay their debts. In addition, Moody’s then recalled that “the budgetary deterioration that we have already seen is greater than we expected”.
The government’s credibility regarding its ability to manage an increasingly unsustainable debt is clearly in doubt, and the agency emphasizes that there is now “a political and institutional context which does not allow us to hope for measures which would improve the budget balance”. We should not forget, for example, the massive protests that took place in France in recent years, when attempts were made to impose tax increases or spending cuts, and which prevented the government from implementing implements its adjustment plans.
Citi confirms that “we agree with Moody’s concerns” and openly states that “he does not believe the 5% deficit target will be achieved this year. We expect a deficit of 5.4%, and even that figure will require a considerable effort.”and believes that Moody’s opinion is a preliminary step to a rating downgrade which will occur in the coming months. The next test that French debt will have to pass will take place on November 29, the date on which S&P will revise the rating, and we also expect, at a minimum, a deterioration of the outlook for the rating.
Japanese investors flee France for Germany
The major analysis or rating houses are not the only ones to question Paris’ projects in terms of debt management. Japanese investors, large holders of European sovereign debt (and the rest of the world), clearly show in their latest movements that they do not have confidence in the good performance of French bonds in the medium term. In September, the Japanese purchased the largest amount of German sovereign debt since 2018: $5.6 billion in a single month.
At the same time, Japanese funds sold French bonds for the fifth consecutive month, the longest streak since 2022. It is now essential for the government to have its budgets approved by Parliament in December, to try to contain the rise in the French risk. premium compared to that of Germany and that it maintains with Eurobonds, which is increasingly high.
Enrique Lluva, Head of Fixed Income at Imantia Capital, explains the importance of Japanese investors to the fixed income market. “57% of French debt is in the hands of foreign investors, a good part of which are Japanese. They bought France thinking they were buying Germany, and they eventually realized that wasn’t the case. and they reverse the movement. And if most of your creditors are foreign, if you make a large issue and the European Central Bank is no longer there to buy everything, France will have to find new clients. And this is done according to price; There is no other solution: pay more,” explains Lluva. This is not good news for the prospects of the French risk premium in the future.
