The specter of a Barnier government collapse sends shivers through the markets

If the government falls, “there will probably be a pretty serious storm” on the financial markets. Is Michel Barnier’s prophecy from Tuesday, November 26, on TF1 already coming true – perhaps, in part, because the prime minister made it? In any case, the specter of a France without a government or budget is beginning to send serious shivers down investors’ spines.

Proof of this can be seen in the sudden tension in the financial markets on Wednesday, November 27. In the run-up to a possible motion of no confidence from the left, which would be supported by the Rassemblement National (RN) to bring down the Barnier government in the next few weeks, banks are demanding, as of now, higher interest rates to lend money to France, perceived as a less secure country than before. On Wednesday, the rate hike sent shares in the major banks nose-diving on the stock market and the CAC 40 fell by 1.4% in the session, a sharper decline than for all other European stock indices.

“The markets are very worried,” said Bruno Cavalier, chief economist at Oddo BHF. “Restoring public finances requires long-term action. Michel Barnier is already on probation and France could end the year without adopting a budget for the following year. We risk entering uncharted territory, with no map, no plan. The markets are putting an increasingly high price on this risk.”

‘No short-term respite’

This “risk premium” can best be seen in the difference between the rates demanded from France and those charged to Germany. Where banks lend to Germany at an interest rate of around 2.16% per annum over 10 years, they were demanding 3.04% from France at midday on Wednesday. That is a difference of 0.88 points. In the morning, the “spread,” as the term goes, even peaked at 0.90. It is the widest spread in a dozen years.

The difference in rates between France and Germany was just 0.20 in January 2021 at the time of the Covid-19 crisis. Over the years, however, the gap has widened steadily, as investors have noted that Germany has been quick to return to its legendary budgetary seriousness – even if it means going into recession – while France has maintained its “whatever it takes” stance and let its deficit slide. With Emmanuel Macron’s dissolution of the Assemblée Nationale on June 9 and the possibility of the left or the far right coming to power, the gap widened dramatically, from 0.40 to 0.75 in the space of a few days. Now, the threat of a fall of the government and its budget has taken it a notch higher.

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