By Harry Robertson
LONDON (Reuters) – French borrowing costs effectively equaled those of Greece on Thursday for the first time as Michel Barnier’s government teetered on the brink of collapse, underscoring a dramatic shift in the way lenders view Greece’s solvency. members of the euro zone.
Opposition parties on the far right and left have threatened to topple Barnier’s government over its budget that includes 60 billion euros ($63 billion) in tax increases and spending cuts.
Bond investors fear that the collapse of the government will mean that any efforts to reduce borrowing will be scrapped.
“A no-confidence vote would reset the progress made with the current budget proposal and trigger a new period of political limbo,” said Michiel Tukker, senior European rates strategist at lender ING.
Amid the euro zone sovereign crisis in 2012, Greece’s borrowing costs, as measured by its yield, soared to more than 37 percentage points above France’s, as Greece appeared destined to default on its debts.
Fast forward 12 and a half years and Greek debt on Thursday morning was trading within 0.02 percentage points of France, at around 3%.
France’s rising debt levels have been slowly eroding its advantages in the bond market for years. Then the risk premium that investors demand to buy French debt compared to that of its neighbors soared in June when President Emmanuel Macron called early elections that resulted in a fragile, hung parliament.
Meanwhile, the countries that were once at the center of the 2012 crisis and that were called PIGS (Portugal, Italy, Greece and Spain) have reduced their debt levels and become more attractive to bond investors.
Greek public debt was already around 100% of GDP before the eurozone crisis and rose to more than 200% when COVID-19 hit in 2020. But it has since fallen to around 160% of GDP and Economists expect it to continue falling. .
French debt is historically high at 112% of GDP and continues to rise. The state has spent heavily in response to the impacts of COVID-19 and the Ukraine war, while tax revenues have been below expectations.
“Even if the government achieved the planned consolidation, France would still have a fairly high budget deficit,” said Max Kitson, a rate strategist. Barclays (LON:).
“If you look at Greece’s debt-to-GDP profile, we see a downward trajectory that contrasts with France’s upward trajectory.”
Similar efforts to control debt – as well as years of bond purchases by the European Central Bank – in Ireland, Portugal and Spain have caused those countries’ borrowing costs to fall below those of France.
On the positive side for France, its bond yields have not risen markedly in absolute terms and, in fact, are down around 16 basis points since the beginning of the month.
Friday afternoon will be a test, when S&P Global Ratings will update its assessment of France, after Fitch and Moody’s (NYSE:) lowered their outlooks on the country last month.