With the French chaos in the background, it was only a matter of time before the 5-year French bond touched the 5% level, something that has not happened since 2002. In this way, the risk premium climbed to 156 points, the highest level in 15 years, widening the gap with the interest rate offered by Germany, considered the safest borrower in the Eurozone, which stood this Wednesday at around 3.41%. It is likely that the spreads will remain under pressure as attention returns to the upcoming budget votes. Even if the budget is approved, investors remain concerned about broader signs of fiscal dysfunction and political fragmentation.
For the moment, some positions of the government on this matter do not seem to reassure. The French Minister of Finance, Roland Lescure, expressed confidence that the French country would manage to approve the budget for the next year, referring to the constitutional mechanisms available to the government in case Parliament fails to reach an agreement on the bill. Lescure explained in his own words: “I am convinced of this because we have no other option, and we have the necessary tools to push it forward; therefore, I am confident that we will succeed. We have two safety mechanisms in this budgetary journey. If we stray off course, we will activate these mechanisms.”
Specifically, the French National Assembly has been debating the budget for the next year. The government bill includes measures worth €43 billion aimed at reducing the deficit and calming the concerns of financial markets regarding the country's public finances. Achieving a consensus that allows for the approval of the texts through voting is complicated in a deeply divided Parliament, a task that could become even more difficult just six months before the presidential elections.
The case of France is perhaps the most visible evidence of a debt crisis and relentless deficits. Yesterday we learned that the public debt of the European Union (EU) reached an amount equivalent to 82.9% of GDP during the first half of the year. The figure is even higher when considering only the eurozone, at 88.8%, and in some cases we could label it as outrageous. Japan has a gross government debt to GDP ratio of 204.4%, the highest among any major global economy. Italy follows with 138.4%, while that of the United States stands at 125.8%, which is only below the record of 132% set during the pandemic of 2020. At the same time, the gross government debt to GDP ratio of France is 118.4%, while those of Canada, China, and the United Kingdom are 110.7%, 106.9%, and 103.6%, respectively.