French 10-year bond yields are on the rise, reflecting growing concerns regarding the nation’s fiscal health. But what does this increasing cost imply for France’s future debt servicing capabilities?
Currently, Cyprus, Spain, and Croatia are considered less risky investments in the bond market compared to France, which holds the title of Europe’s second-largest economy.
The Eurozone sovereign bond market has undergone significant changes over the past year. “Generally speaking, yields have declined across the euro area,” stated Frank Gill, Managing Director and EMEA Sovereign Specialist at S&P Global Ratings, in an interview with Euronews Business, adding that “France is a notable exception.”
Some of the most unexpected trends have emerged from the bond markets of so-called peripheral countries that faced unsustainable debts after the 2008 financial crisis. Today, countries like Portugal, Spain, and Greece are paying less to service their debts than longstanding favorites such as France.
This shift can be attributed to these nations having placed their debt on a sustainable trajectory, aided by low inflation and robust economic growth. “Countries with strong tourism sectors, like Portugal and Greece, are experiencing high growth rates and have solid labor markets,” Gill explained. “These nations are running budgetary surpluses and actively reducing their debt levels. As a result, overall debt in the market is decreasing, which is reflected in Greece’s 10-year yield dropping by 0.5% over the past year.”
Experts predict this trend is likely to persist into 2025. “If these countries maintain their budgetary surpluses, their debt levels will continue to decline relative to GDP, leading to a convergence of their bond yields toward those of Germany,” Gill noted.
What Led to France Losing Investor Confidence?
France has faced unwanted scrutiny in 2023 due to ongoing political unrest, culminating in the absence of a valid budget for 2025. A temporary law has permitted public services to continue operations while adhering to the 2024 budget limits until a new budget is established.
Investors now anticipate that France’s deficit will hover around 6% of its GDP in 2024. To finance this deficit, France will need to continue borrowing, further inflating its existing debt, which already stands at 112% of GDP.
In the near term, this uncertainty surrounding fiscal policy could prevent French yields from decreasing significantly in 2025. “There may be volatility in the French OAT market—Obligations Assimilables du Trésor—depending on the final details of the 2025 budget,” Gill remarked. He highlighted the substantial deficit France faces, predicting that the debt-to-GDP ratio will continue to rise until 2027 without significant adjustments.
Currently, France’s 10-year bond yields have surged to 3.05% following a downgrade from Moody’s on December 14. Since then, borrowing costs have risen slightly, from around 2.75% to 2.8% in December last year.
Investor concerns about the composition of French debt also contribute to the rising costs. “Just over 50% of French debt is owned by non-residents,” Gill noted, suggesting that any reduction in foreign holdings could increase the burden on local banks and domestic creditors, leading to further yield hikes.
Why Political Unrest in Major European Economies Won’t Undermine Bond Markets
Germany, another pivotal player in Europe, is undergoing political turbulence, having recently lost a no-confidence vote, with snap elections scheduled for February 23, 2025. Despite this uncertainty and a contracting economy, 10-year German bond yields sit comfortably at around 2.36%.
In the political landscape, markets will be paying close attention to what the new German government proposes regarding budgetary policies and how they might affect future debt supply.
Both France and Germany boast wealthy economies with substantial domestic savings. “France enjoys a highly liquid banking system, with banks not heavily exposed to sovereign debt. While medium-term challenges exist in terms of fiscal, political, and growth issues, their capacity for self-financing remains robust,” Gill concluded.
Photo credit & article inspired by: Euronews
