En December, France borrowed on the markets at more than 2.9%, while Germany posted a rate of around 2.1%. The difference between the rates of the two countries (the “spread”) is thus 0.8 points. When a country borrows money, the rate at which it can do so reflects, in part, the confidence creditors have in the strength of its economy.
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In this sense, the gap between the borrowing rate of France and that of Germany, considered a model of solidity in Europe, tells us about investors’ perception of French solidity. The gap today, although not alarming in itself, has increased in recent months and marks the passage of a “plateau” which had not been reached for more than ten years. The question now is why and what are the consequences.
Until recently, the French gap was contained, oscillating around 0.5 points, an average consistent with the situation over the last ten years. However, June marks a turning point. Following the announcement of the dissolution of the National Assembly, the differential rose to 0.8 points, and has since stabilized on this new plateau. This lasting crossing of a higher threshold reflects an erosion of market confidence, linked to the political uncertainty created by the dissolution. Although not a major loss of confidence, this development shows that investors are now factoring higher political risk into their assessment of French debt.
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What happens next? Contrary to the initial reaction to the announcement of the dissolution in June, the political events that occurred subsequently did not cause a new surge in this gap: the delay before the appointment of a new prime minister, his appointment, the tabling of the budget, the censorship decision, etc. This relative stability suggests that the markets had anticipated these episodes and integrated their impacts into their evaluations, contrary to the announcement of the dissolution. But the gap has remained on this new plateau for several months, reflecting the fact that French political instability is a new reality, which has increased creditors’ concerns.
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