It makes you wonder who is more on edge. The government of Michel Barnier, which is struggling to pass its budget for 2025? Or investors in the bond market, who panic in the face of any possibility of a motion of censure? Latest outburst: November 27, when the borrowing rate on French debt temporarily surpassed that of Greece, the most indebted country of the Twenty-Seven. Quite a symbol.
The conclusion is obvious: holding French debt is becoming increasingly risky. However, if France displays a debt ratio of more than 100% of its GDP, this is not the indicator that worries the most. “Other countries have [un niveau de dette similaire] but at least they do not have primary deficits at the same time [NDLR : recettes moins dépenses, hors charges d’intérêt] gigantic and chronic”, indicates Bruno Cavalier, chief economist of Oddo BHF, in a note.
This drift is not new. For around twenty years, the country has regularly exceeded the 3% deficit threshold provided for by the Maastricht criteria. Without triggering panic. But since the sovereign debt crisis, “all other over-indebted countries have made consolidation efforts […] while France has done nothing to cure its budgetary incontinence”, observes Bruno Cavalier.
Confidence deficit
Since June, political instability has added to this already gloomy picture. And test the patience of the markets. “The rise in sovereign rates reflects a lack of confidence more than a concern about the budget deficit,” notes John Plassard, director at the private bank Mirabaud. Beyond the secondary debt market, this latent unpredictability has already penalized France in other segments. “Part of the drop in the CAC 40 since the start of the year and in the euro against the dollar is a reflection of this French instability,” continues the expert.
To take the temperature of the risk on the debt, it is appropriate to look at the gap in the French borrowing rate with Germany. “This spread [NDLR : écart de taux] experienced peaks during the presidential elections of 2017 and 2022, when there was a risk that Marine Le Pen would be elected, recalls Nicolas Forest, investment director at Candriam. But with the dissolution of the government in June, then the tumult around the budget, it broke the ceiling of 80 basis points. A first in more than ten years.
After several days of negotiations, the government said it was ready to make concessions to avoid the worst. But the specter of a motion of censure continues to loom. “Market distrust can go further,” warns Vincent Juvyns, strategist at JP Morgan. “If the budget does not pass and the government falls, we can envisage that financing costs will increase further and that the spread will exceed 100 basis points.”
Neither the satisfaction of the European Commission with the French budget, nor the 60 billion savings promised by the government are enough to reassure investors in the long term. “When the figure of 60 billion was announced, the market knew very well that the measures to achieve it would never be accepted by the opposition,” notes John Plassard.
Degraded outlook
Rating agencies are also keeping a close eye on events. After Fitch and Moody’s, the judgment from Standard & Poor’s (S&P) on French credit is expected this Friday evening. In May, it lowered its evaluation by a notch, relegating France to the AA- category. For Vincent Juvyns, a deterioration of the outlook from stable to negative seems inevitable. This opens the door to a lowering of the grade during the next evaluation. “The markets have already factored in this possibility: the spread of sovereign rates with Germany, which has increased since May, clearly shows this. In fact, a deterioration in the outlook would almost be a ‘non-event’,” he tempers. -he. For his part, John Plassard is betting on procrastination. “The rating will have to go down at some point. But we’re in the middle of a budget vote and S&P won’t cut it until we know if the budget passes.”
For the moment, the impact of an increase in rates on debt financing costs would be diffuse, because the Treasury has extended the maturity of French debt, recalls Vincent Juvyns. But if it continues, it would increase the interest burden on the debt. The latter is estimated at some 54.9 billion euros next year.
In any case, it is unlikely that the rate gap with Germany will return to its level before the dissolution, estimates Nicolas Forest. “In the short term, if the budget is approved and there is no motion of censure, it could be reduced by 10 points. But it is the medium term which is worrying: few prospects for growth, a abysmal debt, and a government that could fall at any time.” The passage of the budget would therefore be a first positive signal sent to the markets. Otherwise, the “storm”, mentioned by Michel Barnier, could be imminent.
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