Euro zone presses France to pass budget as bond yields jump

Euro zone finance ministers and the European Central Bank are expected to tell France on Thursday, Oct. 8, to pass a 2027 budget to calm bond markets. French borrowing costs are near 25-year highs, and senior euro zone officials have said neither Brussels nor Frankfurt plans to step in. France's 10-year yield has risen nearly 80 basis points since early September and reached its highest level since July 2002, just under 5%. The gap between French and German 10-year yields widened by about 12 basis points on Wednesday to 139 basis points, more than double its level at the end of May.briefs+1

The bond selloff is happening at the same time as unrest in the streets. On Thursday, for the second time in a week, high school students and their supporters marched across France to demand more teachers and repairs to run-down school buildings, The New York Times reported.nytimes

Moulin: "conditions are not met"

Bank of France Governor Emmanuel Moulin rejected calls for the ECB to step in. In a France Inter radio interview on Wednesday, he said, "The ECB is not there to deal with the fiscal problems of countries — it is there to fight inflation and have inflation around 2%," and added that "the conditions are not met today for an intervention from the ECB". He said he would not be intimidated after far-left leader Jean-Luc Mélenchon said he would seek treason charges against him if elected. Mélenchon has also called on the ECB to cancel or freeze the €488 billion in French government debt held by the Bank of France.news.sbs+1

Marine Le Pen, the far-right leader who is ahead in the polls, presented a plan on Tuesday to cut the deficit. She also said it was "vital to start a discussion with the ECB so that it intervenes to lighten the burden of rates". Finance Minister Roland Lescure said France is far from needing ECB support. He is meeting investors in London on Thursday.briefs

Eurogroup message: pass a budget

"The proper response is to agree on a budget. That's kind of a no-brainer," a senior euro zone official told Reuters ahead of the Luxembourg meeting. Officials said the ECB's bond-buying backstop, which can only be used when yields move in an "unjustified" way, does not cover France's situation. In September, France said this year's deficit would exceed its 5% target. It also plans to sell a record €340 billion of bonds in 2027, and presidential and parliamentary elections are due in April and May of that year.money.usnews

Euro zone officials told Reuters they saw no contagion yet. Other analysts disagree. Ray Attrill, head of foreign exchange strategy at National Australia Bank, pointed to "some signs of contagion" as yields rose in Italy, Spain, Belgium and Greece. The euro fell to a 17-month low against the dollar. Raymond James strategist Jeremy Batstone-Carr said markets have learned that European institutions are "nothing if not creative in the event of a crisis".upday+2