Investors Classify France as a Risky ‘Periphery’ of the Eurozone

According to assessments by major investors, France is increasingly classified among countries with elevated credit risk in the eurozone, primarily due to rising political instability that complicates the reduction of accumulated public debt.

After Prime Minister François Bayrou lost a crucial confidence vote and his government fell, President Emmanuel Macron appointed Sébatien Lecornu as the new Prime Minister on September 9, marking the fourth in less than a year. This has further exacerbated the crisis and pushed interest rates on French government bonds to levels not seen since the eurozone debt crisis.

France is now paying 3.47 percent on its benchmark ten-year bonds, meaning it has surpassed Greece (3.35 percent) and is nearly equal to Italy (3.51 percent), according to the FT.

– France is the new periphery – stated Kevin Thozet, a member of the investment committee at asset manager Carmignac.

The yield spread between French and German ten-year bonds has widened again to 0.8 percentage points, which according to Thozet is becoming the ‘new normal’.

– Europe is moving at different speeds… France is in the slow lane, while Germany and Southern Europe are accelerating – he added.

Bayrou attempted to reduce the deficit, among other things, by proposing the abolition of two national holidays, aiming to lower the deficit to 4.6 percent of GDP by 2025, down from 5.4 percent at the end of this year. The new Prime Minister will need to prepare a fiscal package for 2026, but analysts estimate that it will be significantly milder to pass in parliament.

According to Eurostat data, France’s public debt-to-GDP ratio reached 113 percent in 2023 and is expected to rise to 118 percent by 2026. The credit agency Moody’s downgraded the country’s rating in December, while S&P Global and Fitch maintain negative outlooks; Fitch will publish a new review on Friday, Bloomberg reported.

According to fund managers, there is little hope for significant reforms before the presidential elections in 2027.

– France will be a problematic child for bond markets over the next 18 months – said David Zahn from Franklin Templeton, adding that he expects continued volatility.

Maya Bhandari from Neuberger Berman assessed that ‘fiscal slippage appears to be the main message in every possible scenario’ and concluded that a positive outcome is hard to expect.

It is worth recalling that during the sovereign debt crisis fifteen years ago, investors classified eurozone countries into a safe ‘core‘ and a risky ‘periphery‘. At that time, France was considered a ‘semi-core‘ state, close to Germany. However, this year, investor perception is changing as bonds from former peripheral countries have strongly recovered, while French debt is losing attractiveness.

– What we see today is a slow migration of France towards the periphery category unless fiscal policy is adjusted soon – stated Tomasz Wieladek from T Rowe Price.

Protests and strikes are planned across the country, aimed against cuts and Macron himself. Thozet from Carmignac warned that more serious social unrest could further push bond yields upwards.

French stocks are also lagging behind the rest of Europe. While stock markets across the continent have recovered, the Paris index is falling behind.

– The lack of clarity regarding the future path and the deterioration of the fiscal picture means that the risk premium on French bonds and stocks will not significantly decrease anytime soon – said Emmanuel Cau from Barclays.