French markets hit by threat of government collapse

French sovereign bonds and stocks fell on Wednesday as concerns intensified among investors that a dispute over a belt-tightening draft monetary schedule could bring down Prime Minister Michel Barnier’s government.

The sell-off pushed the gap between 10-year French borrowing costs and those of Germany to as high as 0.9 percentage points, a level not reached since the Eurozone crisis in 2012. It later fell back to 0.86 points.

The point of reference Cac 40 distribute index was down 0.7 per cent, the worst performer among major European markets, having earlier dropped more than 1 per cent.  

Jefferies’ chief European strategist Mohit Kumar said the sell-off was due to “concerns that the current government may not survive the monetary schedule”.

Barnier is seeking to pass a monetary schedule with €60bn of spending cuts and responsibility increases despite his lack of a working majority in parliament. He has confirmed he will have to use a constitutional tool to override lawmakers to do so, a shift that will expose him to a no-confidence vote that could bring down his government along with its monetary schedule. 

Far-correct chief Marine Le Pen has emerged as a key player in the drama because her Rassemblement National event is the biggest in the lower house and its votes would be needed for a censure motion to pass. After conference Barnier on Monday, Le Pen warned that the prime minister was not listening to her demands to protect the French community from responsibility rises and she reiterated a threat to bring down the government.

In an interview with French broadcaster TF1 on Tuesday, Barnier called on opposition parties to pass the monetary schedule, arguing that if it did not leave through, there would be a “large storm and very solemn turbulence on the monetary markets”.

Against a backdrop of political instability, the sell-off in French sovereign debt has pushed the 10-year debt safety yield above 3 per cent, as investors worry about the sustainability of Paris’s obligation load. Yields are now only marginally lower than those in Greece, the country at the heart of the sovereign obligation crisis more than a decade ago.

France’s monetary schedule deficit is on track to exceed 6 per cent of GDP this year, more than double the EU’s target of 3 per cent.

Brussels has put France in an “excessive deficit” monitoring procedure to push it to cut deficits over a five-year period.

Barnier had promised to bring the deficit back to 5 per cent of GDP by the complete of 2025 — a objective economists now view as unlikely — and to profitability to within EU limits by 2029.

“It is challenging to be too optimistic on the trajectory for France,” said Mark Dowding, chief property officer at RBC BlueBay property Management. “There is a uncertainty that [government bonds] could view further selling pressure if the political backdrop deteriorates.”