IMF chief warns France to fix finances as yields surge

The head of the International Monetary Fund told France on Wednesday to "get your house in order." French borrowing costs have climbed to levels not seen since the euro zone debt crisis, and Paris is struggling to push spending cuts through a divided parliament.cnbc

The premium investors demand to hold French 10-year bonds instead of German Bunds is at its highest since the 2010-2012 crisis. French 10-year yields are now above Italy's and have risen more than 100 basis points since the start of the year. The selloff has spread to currency markets. On Monday the euro fell to a 17-month low against the dollar, EUR/USD. Policymakers and analysts disagree on how serious the problem is.gbnews+2

IMF: "Climbing on this staircase"

Speaking to CNBC on the sidelines of an event in Singapore, IMF Managing Director Kristalina Georgieva said France was dealing with "borrowing shock after shock after shock, climbing on this staircase that does not lead to heaven." She added that its politics make it harder for the finance ministry to set out "a clear path for tightening." She said there was "very clear recognition in France that deficit needs to be brought under 5%." The deficit was 5.1% of GDP last year.cnbc

Georgieva said Europe is better protected than during the last crisis, pointing to "the strength of the European Central Bank." Still, she warned that "bond markets respond to fundamentals, and the fundamentals have changed."cnbc

ECB unlikely to ride to the rescue

Candidates to succeed President Emmanuel Macron are putting more pressure on the ECB to buy French bonds or even cancel debt, according to Bloomberg. The ECB's Transmission Protection Instrument (TPI) allows unlimited bond purchases to counter "unwarranted, disorderly" market moves. But France is under an EU excessive deficit procedure, which fails one of the bank's eligibility criteria. Reuters reported that Bank of France Governor Emmanuel Moulin, who sits on the ECB's Governing Council, has cautioned against betting on an ECB rescue. Finance Minister Roland Lescure has said France is "capable" of cutting its deficit.bloomberg+3

"This is not a debt crisis"

Some economists urge calm. "The short answer is no, this is not a debt crisis," Stephane Colliac, a senior economist at BNP Paribas, told the South China Morning Post. He noted that France's effective interest rate is slightly above 2%, close to that of the Netherlands.scmp

Others are less sure. Commerzbank analyst Hauke Siemssen called recent market moves "somewhat reminiscent of a sovereign debt crisis." Deutsche Bank ↗ 0.15% analyst Jim Reid asked whether this is "the start of a new euro sovereign crisis or whether markets have already overshot."gbnews

Political risks remain. Prime Minister Sébastien Lecornu is trying to pass about €54 billion in spending cuts. Violent student protests are now in their third week. Since the 2024 snap election, France has had four governments. Georgieva acknowledged the fiscal adjustment would be "tough, no question about it."dailymaverick+2