French Bond Yields Swing Wildly: Is There Cause for Concern About a European Crisis? [Weekend Money]

French 10-year government bond yields surge to 4.9%
iM Securities: "Not as dangerous as the 2010 PIGS crisis"

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With French government bond yields surging recently, markets have grown increasingly concerned about the financial situation in Europe. There are also concerns that France could be headed for a repeat of the situation faced by the PIGS countries, which triggered Europe’s sovereign debt crisis in the early 2010s.

In a report titled “Volatile French Government Bond Yields: Not a Second PIGS,” iM Securities said that the French 10-year government bond yield, which had climbed to 4.919% on October 1, just shy of the 5% mark, plunged by 11.23 basis points on October 6, with sharp swings continuing.

It noted that the surge in French government bond yields was partly driven by the European Central Bank’s (ECB) interest rate hikes amid inflation concerns and a sharp rise in U.S. Treasury yields, but that concerns over France’s own finances and political instability were other key factors.

France’s fiscal deficit is forecast to reach 5.4% of gross domestic product (GDP) this year, exceeding the 5.1% recorded last year. France’s government debt-to-GDP ratio also rose to 117% at the end of the first quarter of this year, up from 114% in the first quarter of last year.

Political instability is also a concern. “Concerns about France’s fiscal situation are closely linked to political instability,” said Park Sanghyun, a specialist at iM Securities. “Fiscal risks in France are growing ahead of the presidential election scheduled for April and May next year.”

He added, “Above all, it is uncertain whether parliament will pass next year’s budget bill. The French government has announced plans to cut 54 billion euros in public spending to meet next year’s fiscal targets, but the circumstances make it difficult to secure agreement from the opposition.”

However, he said France was unlikely to face an immediate situation like that of the PIGS countries, which triggered Europe’s sovereign debt crisis in the early 2010s. “As National Rally (RN) lawmaker Le Pen has also expressed a willingness to reduce the budget deficit, there may be some further disputes over next year’s budget, but the ruling and opposition parties are likely to reach an agreement to avert a fiscal crisis,” Park said.

“French government bond yields are high by historical standards, but they are relatively low compared with Italian government bond yields, which exceeded 7% during the European sovereign debt crisis in the early 2010s,” he said. “In the worst-case scenario, the ECB could potentially step in as a lender of last resort.”

Park said, “Fiscal risks in France and the resulting volatility in government bond yields are likely to cause significant disruptions in global financial markets this year and next. If political divisions in France deepen around the presidential election and the country’s fiscal situation worsens rather than improving, the risk of renewed concerns about a second PIGS crisis remains.”

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