(Boursier.com) — The political uncertainty that has reigned in France since the announcement of early legislative elections is shaking up the European sovereign bond market. French bonds, traditionally considered one of the euro zone’s safest assets, have sold off so sharply since President Emmanuel Macron dissolved the National Assembly on Sunday that some now offer a higher rate than government debt. Portugal and just a few basis points less than those issued by Spain.
As ‘Bloomberg’ notes, the eurozone’s second-largest economy now finds itself on an equal footing with lower-rated economies that were so indebted that they threatened to bring down the eurozone a short decade ago. . At the height of the crisis, more than a decade ago, Portuguese 10-year bonds yielded around 14 points more than French debt. “This reminds us that policy and budgetary perspectives still matter,” Jan von Gerich, chief analyst at Nordea, told the agency. “Political risks seemed to have been almost forgotten in eurozone bond markets.”
The French president’s decision to call an early vote on Sunday aims to block Marine Le Pen’s access to power after her party’s crushing defeat in the European legislative elections but raises questions and worries the financial community. Investors are now wondering what path the already strained public finances and the future of the presidential program favorable to businesses will take.
In this sense, Fitch Ratings explained yesterday that Emmanuel Macron’s decision increases uncertainty regarding the country’s budgetary consolidation trajectory and the prospects for new economic reforms: “if no party wins an absolute majority, we do not know exactly what a possible coalition government would look like and how stable it would be The election could result in “cohabitation”, where the president and prime minister would come from opposing parties. This would complicate policymaking, because accountability. of economic and fiscal policy would pass from the presidency to the most important party or political group in the National Assembly.
Bruno Le Maire warned this morning that France would be plunged into a debt crisis similar to that triggered in the United Kingdom two years ago if Marine Le Pen wins the legislative elections scheduled for the end of the month and implements its economic program. “A debt crisis is possible in France, a Liz Truss scenario is possible,” the finance minister was quoted as saying by ‘Bloomberg’, referring to the former British prime minister whose short tenure sparked a massive sell-off of government bonds.
If there is a lull this Wednesday with a 10-year OAT rate falling slightly (-0.2 points to 3.223%), some are wondering if the European Central Bank will be able to intervene to ‘save the soldier France’ in the event of new strong tensions on its debt. According to Chris Attfield, European rates strategist at HSBC, the ECB’s latest tool to control European government bond yields “could be paralyzed” in the case of France, if that proves necessary. The ‘Transmission Protection Instrument’ (TPI) was unveiled by the Frankfurt Institution in the summer of 2022 to combat the risk of fragmentation within the eurozone. The specialist reminds the agency that at the time “the intervention of the central bank was necessary to bring the market into line” during the gilt crisis. If the ECB does have this tool today to control spreads, the strategist affirms that its use in the case of France would be complicated given the conditions of budgetary compliance and debt sustainability.
“Even though there are many moving parts, a victory for Marine Le Pen’s National Rally could spark market concerns over fiscal indiscipline and a showdown with the European Commission, as well as further downgrades of the company’s ratings. credit and a widening of market spreads due to sustainability fears. HSBC lowered its conviction on France from slightly bullish to slightly bearish and raised its 10-year OAT-Bund spread forecast to 65 basis points for the third quarter of 2024, compared to 55 bps previously.