Stay informed with free updates
Simply sign up to the Sovereign bonds myFT Digest — delivered directly to your inbox.
France’s borrowing costs have risen above those of Greece for the first time ever, as anxiety grows that Michel Barnier’s government could fail to pass a belt-tightening budget.
The 10-year yield on French government debt briefly reached 3.02 per cent in early trading on Thursday, crossing above the 3.01 per cent yield demanded by lenders to Greece, before switching back.
The crossover reflects an upheaval in the perceived riskiness of Eurozone borrowers, and underscores the concern among investors over France’s fiscal situation and political instability.
“Looks like French politics are about to collide with the bond market,” said Andrew Pease, chief investment strategist at Russell Investments. “I think we know who wins.”
Amid the market moves, French finance minister Antoine Armand sought to dismiss any comparison between the French and Greek economies.
“France is not Greece. France has . . . far superior economic and demographic power which means it is not Greece,” he said on BFMTV, calling on opposition parties not to weaken the country to pursue their own political interests.
“We can still be responsible and work together to improve the budget . . . or there is another road of uncertainty and . . . leaping into the budgetary and financial unknown,” he added.
France’s government bond market has undergone its worst bout of selling in two years during the five trading days to Tuesday, according to flow data from BNY Investments. Geoff Yu, senior markets strategist at BNY, said it was the “most concentrated round of selling . . . since the height of the European energy crisis in late 2022”.
Although French borrowing costs remain well below levels that would signify a bond market crisis, Thursday’s shift underscores how investors are reclassifying Paris as one of the Eurozone’s riskier borrowers.
It also reflects the dramatic decline in Greek bond yields since the 2012 crisis when it received its historic bailout, representing a strong improvement in its economic strength. Last year, its credit rating was lifted to investment grade for the first time.
Barnier’s minority government is trying to finalise a budget that will impose €60bn of tax increases and spending cuts. The government does not have enough votes in the National Assembly, so it will probably have to use a constitutional mechanism to override lawmakers to pass the Budget, which would allow the opposition to call a no-confidence vote.
Barnier’s fate will largely be in the hands of the far-right leader Marine Le Pen, whose Rassemblement National party is a key voting bloc in the assembly. Le Pen has ramped up threats that the RN will move against the government if its budget demands, such as not raising taxes on electricity or cutting reimbursement for medicines and doctors’ visits, were not met.
Aides to Barnier and Le Pen have been negotiating privately in recent days. Armand said the government was “obviously prepared to make concessions to avoid the storm” on financial markets, adding that the opening included the electricity tax issue which Le Pen has made a priority.
France’s budget deficit is on track to exceed 6 per cent of GDP this year, more than double the EU’s target of 3 per cent. Brussels has put France in an “excessive deficit” monitoring process to push it to cut deficits over a five-year period.
Asked about the willingness to make concessions on healthcare costs, Armand said “we are ready to make measured concessions in any area”, adding that budget cuts were needed so efforts would have to be made across the board.
Barnier’s government has been forced to make concessions across the proposed budget in recent weeks, which may render impossible its goal to bring back the deficit to 5 per cent of national output by the end of 2025. France overshot its deficit target for this year and will finish at above 6 per cent of GDP — far above the EU limit of 3 per cent of GDP.