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The government’s effort to get the budget deficit back toward 5% from an expected 5.4% this year will face “strong political headwinds,” ING rates strategists Benjamin Schroeder and Michiel Tukker wrote in a Monday note.<\/p>\n
“But even beyond that, we argue that time is not in favour of French bond spreads. After this year’s budget, the focus will turn to the presidential elections. Those are likely followed by legislative elections and another potentially difficult government formation process,” they said.<\/p>\n
President Emmanuel Macron has installed a series of unpopular centrist loyalists as prime minister across his nine years in power. Next year’s presidential election could deliver a shock from the political extremes, blowing open the question of leadership in the National Assembly once again. <\/p>\n
Compounded by unfavorable conditions amid high European energy costs and fracturing European Union solidarity, ING strategists forecast the so-called “OAT-Bund spread” between French and German borrowing costs will sit between 100 and 125 basis points in the coming months. The European Central Bank may be unwilling to step in to reduce that spread with bond purchases while it is focused on fresh inflationary pressures, they added.<\/p>\n
Chris Attfield, European rates strategist at HSBC, said the move in the OAT-Bund spread had been “far larger than we would expect” given France’s debt-to-GDP ratio, but he added that the ECB would likely only intervene if market moves became “disorderly.”<\/p>\n
“One complicating factor is the rise in non-domestic ownership of OATs, which now exceeds 50%. If these investors prove less ‘sticky’, the question arises of where the swing investors are that will increase their holdings to compensate \u2013 and more importantly, at what price,” Attfield said in a Monday note.<\/p>\n<\/div>\n
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Speaking to CNBC’s Karen Tso on Wednesday, Lars Machenil, chief financial officer at BNP Paribas, said it was important for lawmakers to work on reducing France’s debt \u2014 but “they should take the time to have a budget that makes sense and have it pivot in the right way.”<\/p>\n
“I don’t have a crystal ball, but what I see is that there is a willingness to get this over [the line],” he added, when asked if he thought the budget would be agreed and approved before deadlines expired. <\/p>\n
“We’ll see. But if you see the progress, if you see the timing, things are progressing well,” Machenil said. <\/p>\n<\/div>\n<\/div>\n\n
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