'Get your house in order': IMF chief's stark warning for France over surging bond yields
France is facing a fresh political crisis, as its debt levels and borrowing costs continue to rise.
Even as French borrowing costs have soared, pushing the 10-year bond yield spread with Germany to a level not seen since the euro zone crisis, financial experts are maintaining a calm demeanor. They emphasize that France is not currently experiencing a debt crisis, although they acknowledge the presence of future uncertainties.
Senior economist Stephane Colliac from BNP Paribas stated that while France's effective interest rate is higher than the market yields, it remains at a level comparable to that of the Netherlands. Both France and the Netherlands are grappling with similar inflation rates caused by geopolitical tensions in the Middle East and the overall rise in yields.
French politicians have been preoccupied with debt and budget deficits, but these issues have proven challenging to address within the National Assembly, where no single political group holds a majority. This political deadlock has resulted in the collapse of two governments since the latter half of 2024. As of the first quarter of this year, France's debt-to-GDP ratio had reached a staggering 117%, the highest among EU countries, trailing only Greece and Italy.
The current crisis was primarily driven by market concerns over French domestic politics, according to Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis. These concerns include the government missing its deficit target, the absence of a clear majority in parliament to pass the next year's budget, and an upcoming presidential election in April, all compounded by the escalation of global yields.
European Commission President Ursula von der Leyen's office emphasized that France's economic situation is more complex than that of Greece, due to the differences in their respective economies. While the government's plan for this year did not anticipate the outbreak of war in Iran, experts argue that France is unlike Greece in that it funds itself in euros, possesses a substantial domestic savings base, and operates within the European Central Bank's framework.
A passed budget for 2027, even if it is modest, could alleviate some of the extra premium on French yields, according to Garcia-Herrero. The global uncertainty surrounding the political stalemate in France could potentially impact its ability to fulfill its budgetary plans. Despite these challenges, experts believe that the debt issue is unlikely to significantly affect France's participation in the ongoing trade conflict with China.
France's exports primarily consist of high-value-added sectors such as luxury goods and aeronautics, making it somewhat less vulnerable to trade shocks compared to other economies. However, the country remains susceptible to interest rate shocks given its substantial debt levels.
Written by urgent.news from South China Morning Post's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
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