Eurogroup rules out rescue, tells France to pass budget

Eurozone finance ministers and the European Central Bank have told France to deal with its debt problems by passing a 2027 budget. In Luxembourg on Thursday, Oct. 8, the ministers made clear that no eurozone institution is ready to step in and push down French borrowing costs. They described the political uncertainty behind the market selloff as France's problem to solve, according to Reuters reporting carried by The Korea Herald.biz.heraldcorp

Yields near 5%

France's 10-year bond yield has risen almost 80 basis points since early September. It is close to 5%, its highest level since July 2002. On Oct. 2, the gap between French and German 10-year yields went above 150 basis points, the widest since the eurozone debt crisis of 2010–2012. That same day, Fortune reported that the 10-year yield hit 4.989% and that France's five-year credit default swaps rose to 81 basis points. Yields fell back somewhat on Friday but remained high. Bloomberg reported that bonds from Italy, Greece and Belgium are also under pressure. About 38% of French high-grade corporate bonds now yield less than French government debt.fxstreet+3

Lagarde, Moulin and the limits of intervention

At the meeting, ECB President Christine Lagarde said the bank has tools to counter "unwarranted" market dynamics. Emmanuel Moulin, governor of the Banque de France, called France's fiscal situation "serious" and pointed to a projected deficit of 5.4% of GDP. He also dismissed the idea of ECB intervention. French Finance Minister Lescure also said the conditions for direct intervention are not met. Eurogroup President Kyriakos Pierrakakis said: "we trust France's commitment regarding public finances."investinglive+2

Rabobank's Maartje Wijffelaars said the ECB would probably require proof of a credible budget first. It would likely act only after exhausting verbal intervention and pausing quantitative tightening.fxstreet

The government's budget would cut the deficit to 5% of GDP next year. It is unclear whether it will pass. A presidential election is due in April and a general election in May, and France plans to issue a record 340 billion euros of bonds in 2027. Student protests over education funding are also adding pressure on Prime Minister Sébastien Lecornu.biz.heraldcorp+1

Krugman and Trichet weigh in

In a Substack post on Thursday, Nobel laureate Paul Krugman wrote that France is on a "fiscally unsustainable path." He argued that a rescue would be very expensive and divisive within Europe. "France may have crossed the line from too big to fail to too big to save," he wrote.cnbc

Jean-Claude Trichet, who led the ECB from 2004 to 2011, told CNBC on Friday that "the ball is in the camp of the French government and parliament." He said French politicians must "deliver something which would be credible. That, of course, is one of the conditions to activate TPI."cnbc