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France’s finance minister has warned that the country could face a debt crisis similar to the turmoil in the British government bond market under former Prime Minister Liz Truss if the far-right Rassemblement National wins snap elections this month and subsequent ones.
In a sign of market nerves, French government bonds have sold off sharply since President Emmanuel Macron’s shock announcement on Sunday that he would dissolve parliament and call new elections after his party was defeated by the far right in the European elections.
The sell-off has pushed the gap between French and German borrowing costs to the highest level since October. The cost of certain maturities of French government bonds has also risen above that of Portugal, which defaulted during the eurozone crisis and had a junk credit rating for most of the past decade.
“If the RN implements its program, a debt crisis is possible. A Liz Truss-style scenario is possible,” Finance Minister Bruno Le Maire told local party officials on Tuesday evening.
In 2022, a crisis erupted in the UK bond market when Truss put forward a budget that would have introduced tens of billions of pounds in unfunded tax cuts. Truss was forced to resign after just 44 days in office, but not before the crisis had stripped hundreds of billions of pounds from the value of Britain’s pension schemes.
Le Maire warned that France is “simple”. [does] do not have the resources to finance [RN leader] Marine Le Pen’s additional tens of billions of euros in costs related to the party’s agenda to cut sales taxes and lower the retirement age. The RN did not immediately respond to a request for comment.
The yield on 10-year French benchmark bonds rose by as much as 0.22 percentage points to more than 3.33 percent on Monday and Tuesday, bringing the premium on French borrowing costs compared to Germany’s to 0.62 percentage points.
French bonds later partially erased losses to trade at a yield of 3.25 percent on Wednesday. However, investors remain concerned that, should the RN take or share power, its plans for tens of billions of euros in additional government spending could prevent improvements in the country’s gaping budget deficit.
François Villeroy de Galhau, governor of the Bank of France, warned on Wednesday that the country must clarify its spending path as soon as possible.
“It will be important that France, regardless of the outcome of the vote, can quickly clarify its economic strategy and in particular its budgetary strategy,” he told Radio Classique on Wednesday morning. “Election periods are always accompanied by uncertainty. . . but investors don’t like uncertainty.”
The heavy selling of French bonds this week follows ratings agency S&P’s decision to downgrade French government bonds to a doubling of A minus at the end of May, pouring cold water on the French government’s efforts to improve its public finances.
“If you look at French debt statistics, the deficit is a problem and I think, combined with the political uncertainty, it’s no surprise that spreads have widened,” said Andrew Balls, chief investment officer for global fixed income at bond giant Pimco. The markets were “getting the risk right.”
The French budget deficit was well above target last year at 5.5 percent, putting France on the EU’s list of the excessive deficit procedure. Under new EU rules that come into effect next year, France will have to reduce its structural deficit by 0.5 percent a year until the overall deficit falls below 3 percent.
The government has also pledged to bring the budget deficit below 3 percent by 2027. Cedric Gemehl, analyst at Gavekal Research, said these plans “didn’t seem credible at first” and “even less so now,” adding that “further downgrades seem likely.”
Jason Davis, global rates portfolio manager at JPMorgan Asset Management, said he has had a lower weighting in French government bonds than the benchmark for some time. “The early elections increase uncertainty about the trajectory of French fiscal sustainability and subsequent credit ratings,” he said.
Still, French government bond sales remain more subdued than in 2017, when Le Pen finished second in the first round of voting for the French presidency, pushing the borrowing cost gap between the eurozone’s second-largest economy and Germany down to 0.8 percentage points .
Since 2017, Le Pen has been backtracking on her plans to pull France out of the EU. Analysts said the spread this time should be less intense in the coming months, but warned that the 2027 French presidential election could pose a greater risk to markets if Le Pen remains far ahead in the polls.
“In a nutshell, the key issues for markets are the possible fiscal implications of a Le Pen majority rather than an existential majority like a potential Frexit,” said Meera Chandan, global currency strategist at JPMorgan Chase.
Additional reporting by Kate Duguid in New York