After the tensions which followed the announcement of the dissolution of the National Assembly, the financial markets returned to a precarious calm, despite questions about the outcome of the legislative elections of June 30 and July 7 and persistent doubts about the public finances.
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The surprise of Emmanuel Macron’s decision nevertheless left its mark: on Wednesday June 19, the CAC 40 index of the Paris Stock Exchange showed a decline of 5.4% compared to its level on Friday June 7, before the elections European bonds, and the yield gap between French and German government bonds was close to 0.8 percentage points compared to less than 0.5 points before the election.
This widening of the Franco-German “spread”, which measures the risk premium required by investors to hold securities issued by Paris, does not necessarily reflect a marked increase in France’s financing costs, nor a disaffection among investors for the debt it issues. At 3.16%, the yield on ten-year French bonds is barely higher than its level at the start of the month and demand during the latest issue from Agence France Trésor, which manages the debt and cash flow of the The State, was almost three and a half times higher than the offer.
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Reference to Italy
The fact remains that this episode has damaged the image of France, particularly in the minds of foreign investors, who hold more than 53% of the State’s debt. “France has long been one of the best performers in the euro zone. Today, she has not only fallen below the class average, but she is among the bottom. The French debt and deficit situation is worrying”summarizes Nicolas Forest, investment director of Candriam, an asset manager subsidiary of the American New York Life Investments.
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This widely shared observation could ultimately shake up the hierarchy of borrowers within the euro zone. “Can we imagine that Italy would borrow less than France over a five or ten year horizon? It’s not impossible, even if Italy hasn’t solved all its problems either.”says François Rimeu, strategist at Crédit Mutuel Asset Management.
The reference to Italy comes up among most observers, including to estimate how a France with a government led by the National Rally could evolve, one of the post-electoral scenarios considered the most probable by analysts outside of any political consideration.
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