Storm notice about French debt? Unless a great dramatic brain spill, the government of François Bayrou lived its last hours this Monday. Several political parties opposed to the Prime Minister’s Budget project have already announced that they would not trust him during a vote that will be held in the afternoon, after the general policy speech pronounced by Matignon’s tenant.
An additional episode in the political crisis that runs the risk of strengthening market fears, while France, which faces a worrying debt level, runs the risk of being without a budget by 2026.
The “perspective of an imminent fall of the government” should “maintain the attention of investors during the session”, plans the AFP John Passard, head of the investment strategy in Cité Management Private Bank.
There is no brutal flight of rates to wait
“The impasse of the budget seems almost certain and the 44 billion euros in cups planned by Bayrou will undoubtedly be abandoned,” said Kathleen Brooks, director of Research at XTB. “Consequences: a lower French capital market and greater bond yields,” he continues.
In other words: the rates of which France borrows in the market should continue to progress. Should we expect a brutal or even uncontrollable increase in interest rates in case of a fall in the Bayroun government? No, according to Guerrand Artaz, strategist in the financial year: “I do not believe that there is a risk of increase in rates, as was the case of Liz Truss in the United Kingdom. But there is potentially a continuation of long -term rates,” he explains about BFM businesses.
As a reminder, the British prime minister was forced to resign in 2022 after having presented a budget that had panicked the markets and caused loan rates to explode. However, the fall of François Bayrou should not lead to such a stage. In addition, French loan rates had not jumped the day after the fall of the Barnier government at the end of 2024. However, they gradually rose while France sank into the dead end without budgetary exit.
A fall in the already anticipated government
Because it is this point that refers to investors. Actually, François Bayrou’s resignation has already been anticipated by investors, as soon as the vote of confidence was announced on August 25. The obligation yield at the 30th years of France exceeded September 2 to 4.50%, the first since 2009. For its part, the “10 years” French (French bonds reimbursable at 10 years) increased up to 3.58%, before descending today to 3.45%.
The failure of the vote of trust “has been integrated” by investors, confirms Mathieu Plane, an of of ofCE. He hopes to do so for “propagation” (the indebtedness rate between Germany and France currently around 80 basic points) “continues to increase” due to uncertainty about the continuation of the events: “What will Emmanuel Macron do now? France can adopt a budget that makes it possible to reduce the deficit?
If it excludes a brutal increase in mandatory yields, the economist judges “the risk of Italian (…) of a progressive suffocation, with growing rates.” For example, with a differential of 100 points, it would be “3 billion euros” of debt load in addition to the part of the first year and “35 billion after 10 years, it is huge,” he warns.
Fitch will rule on Friday
Another event will be closely followed by the markets this week: the announcement of the new note that the Fitch agency will attribute to the French debt. According to an Eric Dor analysis note, director of Economic Studies of the School of Administration of the IESEG, “according to its own criteria, the conditions for a degradation of the Fitch note, linked to public finances, already seem together.” Therefore, if such degradation was anchored, the French debt note would go from Aa- à a+.
What consequences in indebted rates? In general, the decisions of the qualification agencies have little or no impact on the performance level of the assimilable Treasury (OAT) bonds “because the investors in the markets were already aware of the problems of the country in question and already taken to determine the interest rate required in their obligations,” said Éric Dor.
But “when a degradation leads to the displacement of the note to a lower category (which would be the case with France in case of AA-A+degradation), there is an ascending effect on the interest rate,” he warns. In part because “certain ceiling funds limit or even prohibit the arrest of sovereign bonds pointed to Mons that AA or AAA”.
Source: BFM TV
