03 December 2024
If you are covering the latest news in financial markets, please see the following comment from Lindsay James, investment strategist at Quilter Investors:
"Investors in French government bonds have once again been watching events in Paris carefully this week, with a vote of no-confidence in prime minister Michel Barnier’s government looking likely to succeed tomorrow. His attempts to make cuts to government spending and gain support for a budget that seeks to bring down the deficit have fired the gun that was loaded when President Macron lost his majority in early elections last summer. This resulted in a minority government stuck between the opposition forces of the New Popular Front and the National Rally.
"France has one of the largest government spending deficits in the EU, expected to come in this year at around 6% and well above EU rules which have a ceiling of 3%. This has resulted in them having to send the EU a plan of action, pencilling in tax increases and spending cuts designed to reduce the annual deficit by around €60bn by the end of 2025, and bringing the deficit down to around 5%. However, the cuts are unpopular, and opposition parties are seeking to gain political capital as a result, so compromise looks difficult.
"It has led to the market sporadically pushing up the yield demanded for lending to the French government. This has seen it rise to a level above what it demands for lending to the Greek government, the country at the flashpoint of the European debt crisis in 2012. But it’s important to remember firstly that French borrowing costs, at around 2.9% for 10 year government bonds, are still well below levels that would signify a crisis and also far below the equivalent UK rate of 4.2%. It does however underscore how investors are now reclassifying Paris as one of the riskier borrowers in the Eurozone, and there is likely to be further volatility ahead.
"Meanwhile European equity markets remain calm, although have slipped in recent months as investors have marked down expectations for profit growth next year. The threat of further tariffs at a time when the German economy is on the cusp of recession as it struggles with both cyclical and structural problems, has already seen investor confidence dented. This latest European political battle, with its now familiar element of government overspend, may hit an effective impasse until next July and the prospect of fresh elections re-draw the battle lines, one way or another."
