The government of Michel Barnier is already in crisis because of no confidence in the Maneuver that the far-right leader Marine le Pen presented when the ultimatum expired. All political forces from the far right to the radical left said no to the 60 billion maneuverwhich involves heavy cuts in public spending and an increase in taxes. The government’s promise to renounce the increase in taxes on electricity was of no avail, because the no to the indexation of pensions weighed more heavily and ruined even the last possibility of an agreement. At this point the France finds itself facing an abyss of an economic and political nature.
OAT yields rise and the spread widens
French government bond yields remain under pressure, after hitting new records last week. The OAT performancethe French government bond, rose again, attestingi at 2.911%, causing it to widen Spreadsthermometer of the crisis, up to 87 points.
At this level the differential with the Bund remains at its highest since 2012, in the midst of the financial crisis, and even above a country like Greece, which records a spread of 85.9 points. The Italian spread on loans remains above 121.7 points, due to the very high public debt, close to 3 thousand billion euros, although significantly reduced compared to last year, when the elections gave a certain result and a government stable.
France pays for political instability
The Premier Barnier and his Minister of Economy Antoine Armandthey struggled a lot to find the support of the different forces in Parliament, but without success.
The Barnier government had resorted to a constitutional stratagem, appealing to thearticle 49.3 of the French Constitutionand, which allows you to pass a law without passing a vote in the chamberwithout prejudice to the parties’ right to present a motion of no confidence.
The leader of the Rassemblement National, Marine le Pen he then carried out his threats and he placed a no-confidence vote (“motion de censure”) on the Budget Law, obtaining the support also of radical left by Jean-Luc Mélenchon, who joined the far right against an economic maneuver deemed too austere and also asked for President Emannuel Macron to take a step back. The motion will be discussed tomorrow by the Assemblée Nationale.
The last attempt to pass the budget has failed, attention now focuses on events that will involve the executivesince the Chambers cannot be dissolved until July and the President cannot be forced to resign. A situation that it heralds ungovernability and chaos at a very delicate moment for France and the EU.
The targets imposed by European rules are at risk
With the rejection of the budget law and the fall of the Barnier government, i times for the approval of a new financial plan will become longer to excess. A new maneuver will require at least 70 days of discussion in the Assembly. And with the fall of the government we will arrive at least until spring.
All this will put the possibility of hitting the rigid European targets is at risk in terms of reduction of the deficit and debtwhich the maneuver of former European Commissioner Michel Barnier aimed to achieve. “The French would not forgive us for putting particular interests ahead of the future of the nation”, declared the Prime Minister and former EU Commissioner.
The budget deficit of France had reached 5.5% of GDP in 2023 and is expected to further increase to 6.1% in 2024which exceeds the initial target of 5.1%. Barnier’s maneuver aimed at a plan of fiscal consolidation of approximately 60 billion euros, equal to 2% of GDPto realign with the targets of the new European rules.
What the analysts think
For analysts of Generali Investmentthe possible developments of the French political scene “will not support a narrowing of the French spread” and therefore it is expected that “the spread may continue to move in the range observed in recent days, pending political developments, with a non-marginal risk that from January onwards, with a resumption of financing activities, the market will go to test the 100bps level“.
For Peter Goves, analyst at MFS Investment Management“the volatility of the OAT-Bund will probably remain very high”. “Even if the budget project seems destined to be approved (despite the possible vote of no confidence) – underlines the expert – political uncertainty will remain very high. It is difficult to see a way out of the current impasse, given that the parliamentary framework cannot be changed until summer next year. In light of this,it’s difficult than the OAT-Bund spread stabilize soon. The decline in confidence indicators is another measure to monitor to assess the prospects of the bond market.”
