France is under threat of a financial crisis, in the event of victory of the National Rally, as well as the Popular Front in the legislative elections scheduled in 15 days, warns among others Bruno Le Maire, the Minister of the Economy. Should we take this warning seriously?
The alarmist statements come from those who have the most to lose in the next legislative elections, Renaissance, the president’s party, as well as the Republicans. But the excitement is also very noticeable and very real on the markets.
Political uncertainty and fear of government instability caused the stock market to falter. It lost 6% last week, erasing all the gains accumulated since the start of the year. On the debt market, the 10-year Treasury bill rate, the barometer of French public finances, is at 3.1% while the German rate has fallen to 2.36%. The gap between the two suddenly widened, reaching 80 points, the largest variation ever observed since the debt crisis of 2012. The background to this brutal decline is the fragility of finances. French public sector, with a deficit which exceeded 5% in 2023 and its sovereign rating recently lowered by Standard and Poor’s.
Read alsoFrance’s sovereign rating lowered by S&P rating agency
A Liz Truss-style scenario?
France could relive the crisis experienced by the United Kingdom in 2022. Lizz Truss, the short-lived British Prime Minister, then proposed massive tax cuts without providing new revenue. In a few days, British rates soar, the pound collapses, it takes the intervention of the Bank of England and the resignation of Liz Truss to restore calm. What the City sanctions is unfunded spending. Exactly what is being criticized today for the program of the National Rally and that of the Popular Front. The two blocks have not yet quantified their respective projects. They are increasing their proposals to support purchasing power and both plan to cancel the pension reform. Whoever the next government is, warns Philippe Crevel of the Circle of Savers, it will face a degraded financial situation, with markets becoming hyper suspicious. On the Paris Stock Exchange, it was the shares of French banks, those with a lot of French debt in their portfolio, which fell sharply, losing 12 to 16% of their value.
More warnings ahead
Other warnings could come in the coming days. Coincidentally, this Wednesday, the European Commission could once again place France under excessive deficit procedure. Which means increased financial monitoring by Brussels and therefore a major challenge for the future government: the team resulting from the vote of June 30 and July 7 will have to present to the Commission a credible road map to reduce the deficit and France’s public debt. The other event that will be closely scrutinized on Thursday is the issuance of ten-year debt. We will then see if the prospect of a far-right government hostile to Europe at the head of the second country in the euro zone turns investors away from French debt, and what the price will be to pay.
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