As a selloff in French government bonds deepens, the region’s debt-laden economies risk a surge in borrowing costs while also grappling with increasing social unrest.
French 10-year bond yields on Thursday hit a fresh 24-year high above 5%, driving their premium over benchmark German Bunds to nearly 180 basis points, or 1.8%, the most since the depths of the euro zone debt crisis in 2011.
A huge fiscal deficit that has been complicated by political stalemate in Paris and the worst civil unrest in years are the latest catalysts.
As France has come under strain, investors are turning up the heat on the likes of Italy, Belgium and even Greece. Similar to France, students took to the streets in Belgium at the weekend to protest against high housing costs, while Italy has also faced protests. Italian yields have risen 14 bps this week to 4.616%, not far off early October’s three-year highs. The premium Belgium pays to borrow over 10 years relative to Germany rose to its highest in 14 years at 109 bps.
“Markets look ahead and they say ‘well, if borrowing costs stay this high, then eventually you’re going to have to refinance at higher rates’,” said Mike Bell, head of market strategy at BlueBay Asset Management.
While he does not expect the gap between French and German bond yields to get as wide as those of Italy and Spain against Germany during the euro debt crisis, which hit 6% and 5% then, respectively, it could exceed 2%.
Bell said concern that French politicians would shy away from taking the necessary steps to put France on a sustainable debt path, especially given the protests, could heighten pressure.
TAKE OUT SOME INSURANCE
Belgium’s debt yields have risen steadily this year along with those elsewhere given rising energy prices, but that rise has accelerated. Its 10-year borrowing costs rose by as much as 12 bps on Thursday to 4.54%, the highest since early 2012. Highlighting the unease, the cost of insuring against the risk of default for Belgium hit its highest since April 2020 on Thursday at nearly 39 basis points.
This is well below the levels logged during the euro zone debt crisis in 2012, but the speed at which Belgian CDS have risen rivals that of France, with both having more than doubled in the last month.
“Belgium’s had a lot of debt for a long time,” Chris Scicluna, head of research at Daiwa Capital Markets, said.
“It obviously has a history of political paralysis and government paralysis and if you’ve got a deficit that needs to be reduced, sadly, over the years, that’s not helpful,” he said.
“So, it does tick a lot of the boxes that should leave investors uneasy, but certainly, it’s not France.”
Italian bonds have performed strongly in recent years, bringing their yields below those of France last September for the first time since the debt crisis. They, too, are back in the spotlight.
An election next year throws doubt on Rome’s plans to reverse the rise in its huge public debt, analysts say.
Prime Minister Giorgia Meloni approved tough anti-riot measures after unrest swept northern Italian cities at the weekend, including financial capital Milan.
“Fuel prices, widespread cost-of-living pressures and housing prices continue to top the list of grievances, underlining the point that while many developed economies continue to show considerable resilience, there is little or no ‘feel-good factor’ for the majority of the public at large,” ASM Investor Services global economist Marc Ostwald said.
(Reporting by Amanda Cooper)
