Fund managers warn French debt selloff threatens banks

France's government borrowing costs have climbed to their highest level in more than two decades. Fund managers now warn that Paris has little room left in its budget and that the pressure on French government debt is starting to hit the country's largest banks. The yield on the 10-year French government bond, known as the OAT, reached 4.9937% in early October. CNBC reported that this was the highest level since July 10, 2002. The yield had jumped 70 basis points in September. The extra yield investors demand to hold French debt instead of German Bunds rose above 150 basis points this month, the widest gap in nearly 15 years.cnbc

The bond market has calmed slightly since then. The 10-year yield eased to about 4.87% on Oct. 9. Trading Economics data show the gap with Germany narrowing to around 135 basis points that week, down from 159 basis points the Friday before.tradingeconomics

'Without a safety net'

According to a survey of investment firms by Europa Press, the selloff has raised doubts about how much the French government can do. Jakub Lichwa, a portfolio manager at Vontobel's TwentyFour Asset Management, said "the technical outlook does not lead us to believe that we have yet reached a ceiling." He added that "several politicians are guilty of adding fuel to the fire with various irresponsible comments". Philippe Waechter, chief economist at Ostrum Asset Management, said flat government revenues, rising energy prices, high interest rates and an exhausted budget have left France's economy "without a safety net".europapress+1

Bank of France Governor Emmanuel Moulin called the country's fiscal position "very complex." He ruled out help from the European Central Bank, saying, "France should not seek solutions in Frankfurt, the solutions are at home". Investors are also looking ahead to the 2027 presidential election, which adds to doubts about whether France can get its public finances under control.democrata+1

Banks under pressure

French banks did worse than other European lenders over the past five trading days, in both share prices and credit markets. Europa Press reported that BNP Paribas shares fell 2.4% over the week, Crédit Agricole fell 3.7% and Société Générale dropped about 5%. Fund managers point to several risks. Higher government bond yields can squeeze bank profits because banks fund long-term loans such as mortgages with deposits. A cut to France's credit rating could raise the banks' own borrowing costs. The government could also raise taxes on banks to help close its deficit.europapress+1

The banks also have some protection. European Central Bank data show French government bonds make up about 2.5% of French banks' total assets, compared with close to 10% for banks in Greece and Italy. TwentyFour estimates that the big French banks' holdings of OATs equal 15% to 30% of their core capital, known as CET1. The three largest groups earn more than half their revenue outside France.democrata+1

"The advantage of diversification for these large banking groups is real," Lichwa said, "and the pillars of foreign income can provide stability when national sovereign debt faces tensions".democrata