par Harry Robertson
The risk premium required by investors to hold French public debt fell on Monday after the government, threatened with censorship, renounced a plan to defund medicines in 2025.
The government announced in November as part of the draft Social Security budget (PLFSS) a change in drug reimbursement rates in 2025, a measure criticized by opposition parties, notably the National Rally (RN), which assured Monday that “barring a miracle”, he would vote for censure against the executive.
The spread between French and German 10-year bond yields, a measure of French borrowing costs relative to the euro zone benchmark, stood at around 12:20 GMT at 81.6 basis points (bps) versus about 85 bp before the government's announcement.
This spread had climbed in the morning to 86.8 points, a high level but below the 12-year high reached last week, when it rose to 90 bps.
Before the government's latest concessions to the RN, the yield on 10-year French bonds had briefly exceeded that of Greece on Monday for the first time, after having come close to parity last week.
Bond investors will be particularly attentive at 2:00 p.m. GMT when Parliament must vote on the PLFSS. Above all, they fear that a collapse of the government would lead to the abandonment of any effort to reduce the debt burden.
“A government collapse would likely lead to a continued and prolonged period of policy paralysis, as Emmanuel Macron would still struggle to put together a viable government deal,” said Richard McGuire, head of rates strategy at Rabobank.
On Friday, the S&P Global Ratings agency maintained its rating on France's long-term sovereign debt with a stable outlook, despite the current budgetary turmoil, which offered a first respite to Michel Barnier's government.
(Reporting by Harry Robertson; French version by Claude Chendjou, edited by Kate Entringer)
