French borrowing costs hit highest since 2002 amid protests

France's government bond selloff could drag on, analysts warn, as student protests demanding more spending collide with investors pushing Paris to cut it. Prime Minister Sébastien Lecornu has said the government will present its response to the protests at the end of October. Strategists say that timing leaves France stuck between the street and the bond market, with presidential elections due next spring.barrons

France's public debt has climbed to about 120% of gross domestic product. On Thursday, high school students and their supporters marched across France for the second time in a week. CNBC reported that hundreds of schools were expected to close during a protest week organizers call "semaine noire," or "black week".nytimes+2

A possible "doom loop"

Macquarie strategists Thierry Wizman and Gareth Berry wrote that the protests raise the chance the government offers "expensive concessions" even as rising yields make that harder to afford. They see a possible "doom loop" between protesters and higher sovereign borrowing costs. They said they saw no deposit flight from France through August, but that withdrawals would be the first sign the European Central Bank might step in directly.barrons

The Wall Street Journal News Corp ↗ 0.28% reported that a distant tail risk also hangs over the market: default. Most analysts treat that as unlikely. Matt Eagan of Loomis Sayles said Europe is not yet in crisis, but "yellow lights are flashing." He added that euro members would not help France directly "without concessions from those governing the country".wsj+1

Spreads and banks under strain

The gap between French and German 10-year yields reached almost 160 basis points last week, its highest since 2012, Reuters reported. It narrowed early this week, then widened again on Wednesday. France's benchmark yield has risen about 1.26 percentage points this year to its highest level since 2002, according to CNBC.reuters+1

The stress has spread to lenders. Bloomberg reported on Oct. 5 that the cost of insuring French banks' bonds against default had risen above that of other major European lenders. Shares of large European banks fell sharply on Wednesday as the bond selloff resumed, Reuters reported.ground+1

Budget fight ahead

Lecornu's budget would cut about 43 billion euros in public spending, and he has to pass it through a divided parliament where he lacks a majority. Parliamentary budget debate is scheduled to start Oct. 13. Lecornu has also said the government must bring the deficit down to 5%.cnbc+2

Gavekal's Cedric Gemehl said current spreads assume France meets its 2026 budget target, makes more fiscal cuts next year and avoids a major weakening of its finances after the election. "But there is a large probability that one or more of these assumptions will prove wrong, which would lead to a further widening in French spreads," he wrote.barrons