France Is Paying Over 5% on Its Debt for the First Time Since 2002. European ETFs Are at Risk
The yield on French bonds has exceeded 5% for the first time since the euro was introduced, and Paris is borrowing at a higher rate than Rome. The market isn’t betting on a default, but on something more insidious for your portfolio. And this time, the ECB has no way to intervene.
Key points
The yield on French bonds reached 5% for the first time since 2002, and Paris is borrowing at a higher rate than Rome.
The gap between two-year and 10-year bonds reveals what the market is really afraid of.
Krugman talks about a country that may be too big to save.
The ECB’s tools from the 2012 crisis come with a condition that France currently does not meet.
Friday, October 23, Monday, October 27, and Thursday, October 29 make up a calendar that will decide the fate of European portfolios.
Five percent, a rate France hasn’t paid to borrow since the euro was introduced
On Wednesday, October 21, something happened that only investors with nearly a quarter-century of experience remember. The yield on France’s 10-year government bond (OAT) climbed to 5%, its highest level since 2002. It rose 7 basis points in a single day, and the gap with the German Bund, currently at 3.41%, widened to 159.4 basis points. That’s the highest in 15 years. Just a year ago, the gap was around 59 basis points.
Even more important is a comparison that hasn’t made as many headlines. Italy, long a symbol of Europe’s debt problems, borrowed for 10 years at 4.58% on Monday. France is therefore paying around 30 basis points more than a country whose debt-to-GDP ratio is a good 20 percentage points higher. The market isn’t pricing in the level of debt, but the ability to do something about it.
And that’s exactly what’s missing. The deficit reached 5.1% of GDP last year, Prime Minister Sébastien Lecornu is promising savings of 54 billion euros, but a parliament without a majority is dismantling his budget piece by piece. The vote on the tax portion has been postponed to October 27, and the amendments already approved would widen the deficit by another 10 billion euros. Add weekend riots and looting, unions calling for strikes, Brent at $110, and European gas prices, which rose another 4% on Wednesday. The energy shock pushes up inflation, inflation pushes up interest rates, and higher rates crush a country that has to borrow every year to cover both its deficit and maturing debt.