French bond rout reshapes race to succeed Lagarde at ECB

France's government borrowing costs reached their highest level in more than two decades last week. On Wednesday, October 21, the 10-year OAT yield went above 5% for the first time since 2002, as CNBC reported. The country is dealing with violent protests and a split parliament that is struggling to pass a budget. The selloff has now spread into the race to lead the European Central Bank. Bloomberg reported Sunday that the contest increasingly hinges on which candidate can best take on the bond vigilantes.bloomberg.com+1

Spread nears crisis-era highs

The selling got worse on Thursday. LSEG data showed the 10-year yield rising as high as 5.142%, and the gap over German Bunds widened to 173 basis points, the widest since 2011, according to Dow Jones Newswires. The Telegraph put the premium at about 1.7 percentage points. That is close to the record of roughly 1.9 points set in late 2011, and the paper warned that the French bond market is "on the verge of a structural crisis". It noted that the 10-year yield was below 4% as recently as August.telegraph.co.uk+1

Prime Minister Sébastien Lecornu is aiming for 54 billion euros in spending cuts. Finance Minister Roland Lescure said the government could use Article 49.3 of the constitution to force the budget through without a vote. "We have no choice," he told RTL. Investors are also watching next spring's presidential election, where Marine Le Pen is currently the frontrunner.cnbc.com

Some analysts are less worried. UniCredit's Marco Valli said French spreads "remain far from levels that prompted European Central Bank concerns in the past".morningstar.com

ECB under pressure

The ECB will meet on Thursday, October 29, and is expected to keep its key rate at 2.5%. Lagarde has said France must fix its debt problems by cutting its deficit, so the bank is not expected to use its Transmission Protection Instrument bond-buying tool any time soon, Reuters reported. Berenberg's Holger Schmieding told Reuters that if the bank did act, it would probably shield other countries from contagion, "not France."rmb.reuters.com

Succession race

Klaas Knot of the Netherlands and Pablo Hernández de Cos of Spain are seen as the frontrunners to succeed Lagarde. In a Bloomberg survey, 12 economists picked de Cos and nine picked Knot. Lagarde's term ends in October 2027, but she could be named chair of the World Economic Forum as early as November. Leaving early would allow a successor to be chosen before France's election.bloomberg.com+1

The Telegraph doubts the ECB will step in to rescue France. It noted that Le Pen, now favored by bookmakers to win the presidency in May, has said she would withdraw France's contribution to the EU budget.telegraph.co.uk