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- French government bond yields rose Monday as weekend unrest added to investor concerns over the country’s fiscal and political outlook.
- The euro weakened and the CAC 40 fell, while the premium on French debt over German Bunds remained near levels last seen during the euro-area debt crisis.
- Investors are also focused on whether Prime Minister Sébastien Lecornu’s minority government can pass the 2027 budget and set out a credible path to reduce France’s deficit.
watch nowVIDEO05:40Unrest roils France as Macron faces pressure over riotsSquawk Box Europe
Social unrest, political instability and mounting national debt weighed on French assets early on Monday, with government bonds and Paris-listed stocks under pressure.
The euro was last seen down 0.15% against the U.S. dollar, and was 0.13% lower against the British pound.
The French 10-year bond yield jumped 7 basis points, remaining near its highest level in decades despite some recent easing. Higher yields represent higher borrowing costs for the government in the debt market. The country’s 2-year and 30-year yields were up 2 basis points and 6 basis points, respectively.
Stocks are also feeling the heat, with the CAC 40 index down nearly 1% in early deals on Monday. The market has significantly underperformed its European peers in recent years, despite only around 15% of its revenues being generated domestically, with banks under particular pressure.
The French stock market is historically sensitive to any widening in the so-called “OAT-Bund spread”, the extra bond yield France pays over Germany, which has hit the highest level since the European Sovereign Debt Crisis of the early 2010s.
Widening bond spreads raise concerns about the cost for companies to raise capital and heighten fears of higher taxes and tighter regulation.
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France’s luxury names are being further harmed by a broader downturn in high-end consumer spending in China, Sharon Bell, senior European equity strategist at Goldman Sachs, told CNBC’s “Squawk Box Europe” on Monday.
“Risk perception of French assets is impacted” by the latest turmoil, Bell said.
Hundreds of thousands of people marched over the weekend in protest over political paralysis, the cost of living and the state of public services, including schools and healthcare. Mass gatherings in cities from Paris to Lyon and Marseille spilled into dramatic scenes of buildings and cars set on fire, clashes with police and more than 2,000 arrests.
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The latest escalation “won’t make it easy for the international community to be totally comfortable buying” French government bonds, analysts at Deutsche Bank said Monday.
That comes after investors already pushed France’s benchmark borrowing costs to the highest level since 2002, demanding a higher premium to fund the country’s spending.
Key concerns include uncertainty over next year’s presidential election, in which far-right Marine Le Pen is topping many polls, and whether the minority government of Prime Minister Sébastien Lecornu can pass the 2027 budget currently under negotiation. Budget negotiations are increasingly fraught in France and have toppled two of Lecornu’s recent predecessors.
watch nowVIDEO02:01How high is the ECB’s pain threshold? We might be about to find outSquawk Box Europe
Analysts say lenders are demanding a strong program of fiscal consolidation to avert a debt crisis, as France’s persistently high deficit-to-GDP ratio and weak economic growth keep pressuring government borrowing costs.
“It will be difficult to see the budget deficit come down without painful measures,” Goldman Sachs’ Bell told CNBC. “Taxes could well go up for French businesses. I think taxes may generally go up in France, fiscal consolidation means you need to either spend less or tax more. Those things are very tricky.”
“Le Pen, who is riding high in the polls at the moment, she’s talked about keeping a ‘Golden Budget [rule] during her term, but she’s not really detailed how that would happen,” Bell continued.
“One of the reasons that OAT-Bund spreads are not coming in is because investors are skeptical that you will see any fiscal consolidation and a decline in that budget deficit.”
Bell added that she did not believe current conditions warranted any emergency intervention by the European Central Bank, which “doesn’t want” to use tools such as its Transmission Protection Instrument.
However, she said if spreads start to disrupt market liquidity, the ECB would opt to use the mechanism.
watch nowVIDEO05:15’Painful’ reform needed in France: Goldman SachsSquawk Box Europe
Such a move would be politically sensitive, likely requiring France to engage in even more stringent fiscal reforms over a long period akin to those by countries such as Greece and Ireland during the Sovereign Debt Crisis, she added.
“Sometimes it does take market pressure, and that’s what we’ve seen this year.”
