France records highest risk premium on its bonds since 2011 European debt crisis

The risk premium on French government bonds has risen to its highest level since November 2011, with the spread between the 10-year French bond yield and its German counterpart reaching 173.58 basis points.

The 10-year French yield recorded 5.142%, the highest level since 2002, before settling at 5.14% with a gain of 10.5 basis points by 16:50 Turkish time. In contrast, the corresponding German yield declined 4 basis points to reach 3.38% as demand for safe-haven assets grew.

The repercussions extended across other eurozone countries; the spread between German and Belgian bonds widened to 111.28 basis points, while the Italian spread reached 123 basis points, the Spanish 71 basis points, and the Greek 102 basis points.

The severity of the pressures stems from three intertwined factors: the difficulty of the weak government in passing deficit-reduction reforms through parliament, the eruption of looting and violence during protests over rising cost-of-living and education system concerns, as well as escalating electoral competition ahead of the presidential elections scheduled for next April. Analysts view the advances of far-right leader Marine Le Pen and left-wing opposition figure Jean-Luc Mélenchon in opinion polls at the expense of other candidates as the most damaging scenario for deficit-reduction efforts.

French borrowing costs stood near 3.2% at the end of February, before rising under pressure from soaring energy prices following the war in the Middle East, which fueled inflation and strained high-debt economies, making France the most affected in the bond markets of Group of Seven nations.

Investors are watching the European Central Bank meeting on October 29, as analysts believe the wave of risks emerging from the French crisis may force the central bank to soften its hawkish stance, which has kept the door open for a rate increase in December. In this context, Carsten Brzeski, chief economist at ING Germany, pointed out that the sharp rise in bond yields stemming from the French financial crisis is producing a tightening effect in the market equivalent to a rate increase of between 25 and 50 basis points, even if macroeconomic data would normally support a further rate increase. Brzeski saw that the bond market has taken on itself the role that the European Central Bank should be playing, exerting pressure on growth and inflation.