"Rising as High as the Eiffel Tower"... French Bond Yields Hit Highest Level Since 2008 [Weekend Money]

Budget Wars Oust Two Prime Ministers
Government Debt-to-GDP Ratio Expected to Rise by 2 Percentage Points
Fears Grow Over Vicious Cycle of Slowing Growth

As the French government prepares to submit its 2027 budget proposal, long-term interest rates are soaring. Both of the previous two prime ministers stepped down in succession as a result of opposition to austerity budgets from opposition parties, leading to increased demands for expanded fiscal spending. Analysts are predicting that upward pressure on long-term interest rates will persist.

Sebastien Lecornu, Prime Minister of France. Photo by Yonhap News Agency

According to KB Securities on October 3, the yield on 10-year government bonds has reached its highest level since 2008. The gap (spread) between French and German government bond yields has also widened to over 100 basis points (1bp=0.01 percentage point), the largest since the Eurozone debt crisis.

The newly appointed Prime Minister, Sebastien Lecornu, is taking a more flexible stance with less austerity compared to former Prime Minister Bayrou. While Bayrou sought a comprehensive freeze on spending by suspending inflation indexation for all pensions, Prime Minister Lecornu is attempting to ease opposition from other parties by protecting small pensions and limiting inflation indexation only for large pensions through a more selective policy.

However, the Socialist Party, which holds the casting vote for passing the budget, is instead demanding a significant increase in government spending related to public welfare. The Socialist Party proposes raising the inheritance tax on large estates and increasing social security contributions (CSG) on labor income to fund these measures, and insists that the additional revenue be allocated towards increasing the minimum wage and tackling climate change. Even if the Socialist Party accepts limits on pensions, it is considered unlikely that they will back down on demands for increased spending.

KB Securities has assessed that additional fiscal concessions and demands for expanded spending arising during budget negotiations with the opposition will continue to exert upward pressure on France’s long-term interest rates. According to the draft budget released last month, the government debt-to-GDP ratio in France is expected to rise by more than 2 percentage points next year compared to this year. In addition, a potential wave of strikes from labor unions protesting austerity raises concerns about a slowdown in economic growth. If the economy slows, tax revenues will decline, creating a vicious cycle that further increases the debt ratio.

Heejin Kwon, a research analyst at KB Securities, said, “With the political burden of passing the budget ahead of next year’s presidential election, and given that the government does not have a majority in parliament, negotiations with the opposition are inevitable. Considering the possibility of further fiscal concessions during the budget negotiations, we expect that fiscal concerns will remain prominent for the time being, and that downward rigidity in long-term interest rates will persist.”

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