The scale of the disturbances are, to say the least, evidence of profound dysfunction.
Writing about the growing market jitters over the state of France’s finances in the Wall Street Journal earlier this month, Stacy Meichtry and Chelsey Dulaney pointed to, among other factors, “concerns that France has become so ungovernable that its political system can no longer take corrective action.”
News of the disorder in Paris and other French cities, let alone the images of the destruction of the town hall in Limoges, over 200 miles southwest of the French capital, will not ease those concerns. The trouble may have begun with protests over school conditions, but the scale of the disturbances that have ensued are, to say the least, evidence of profound dysfunction and are hardly likely to encourage the current French government to cut back on spending.
Five-year French sovereign credit default swap spreads (essentially the price paid to insure against a French default) have soared recently to around 80 basis points, against just over 30bp in late August. This is the highest they have been since the ebbing of the eurozone crisis (during which the spreads were as high as 250bp). Even at 80bp, the expectations of a French default are still very low, but the movement in the price of insuring against it is worth noting as another indication of deteriorating market sentiment. The yield on France’s benchmark ten-year OAT (government bond), which has been rising, as have yields elsewhere, since the beginning of the Iran war, started to move up sharply in August and has now reached 4.8 percent, the highest level in over 20 years.
Given the state of France’s finances, that’s not helpful. France’s government debt stands at around €3.6 trillion, meaning that it has a debt/GDP ratio of around 120 percent. Its budget deficit is about 5.4 percent, far above the “rules-based” eurozone stipulation of 3 percent. Cutting that further (it has been falling since the pandemic peak) is a feat that may elude the weak minority government now in place in Paris.
Moreover, as the WSJ’s Meichtry and Dulaney explain:
France has more than $1 trillion in debt coming due by 2030, and next year is set to sell a record of about $380 billion in debt into a market where once-reliable sources of demand have evaporated. France’s central bank is no longer buying government bonds and is instead letting its portfolio shrink as bonds mature. Once-steady investors like Japanese asset managers have also stepped back. Hedge funds that have stepped into the void have been burned by the recent volatility.
Oh yes, there is a French presidential election next year, for which the frontrunner is Marine Le Pen of the populist-right RN. She has said that she wants to reverse (or more) the leisurely planned increase in France’s pension age to 64. Meanwhile, at least until the current riots, her most likely opponent has been Jean-Luc Mélenchon of the far-left LFI. If that changes on the back of the LFI’s “association” (perceived or otherwise) with the drama playing out in France’s streets, Le Pen may face a less divisive opponent. In all other respects, it is hard to imagine that she has not been helped by the current disorder.
France, of course, is in the eurozone, meaning that a French debt crisis could spread elsewhere through a currency union distinguished mainly by shoddy construction and economic illiteracy. Heading off, to use the dread word, contagion will be something that Brussels and the European Central Bank will be intent on doing. The way things are headed, their ability to do so may soon be put to the test.