Btp Bund spread approaching 100. France worries
Markets worried about the tightness of public accounts across the Atlantic after the fall of the Barnier government. But the BTp-Bund spread falls to its lowest level since 2021
by Morya Longo
3' min read
Key points
3' min read
The most common attitude in the markets is what is known in the jargon as 'wait and see'. "Wait and watch". That is why the French political crisis, which deflagrated on Wednesday with the confidence in the Barnier government, did not create panic yesterday. On the contrary, a statement by Marine Le Pen, according to which the budget law can be made 'in weeks' as long as it is softer than the hard law presented by Barnier, was enough to bring the spread between French and German government bonds down to a two-week low: 78 basis points. Not many days ago the France-Germany spread had risen to 90. 'Wait and see', then.
But that this is an armed truce, also caused by the rise in German yields yesterday, is shown by another spread: that of Italy. Compared to Germany, our ten-year BTp yields fell to 109 basis points (lowest since October 2021) and compared to France, they fell to 30 basis points (lowest since back in 2008). This is also because investors exiting France, albeit cautiously, are partly moving to Italy. For once, in short, the contagion seems to be reversed: the more France suffers, the more our BTp's benefit. This shows that, despite yesterday's calm, France remains under special surveillance in the markets.
The French case
.The market looks anxiously at Paris' public budget numbers: the deficit is at 6.2 per cent of GDP (with forecasts going up to 7 per cent in 2025), the primary deficit (that net of interest expenditure) is the highest in Europe at -4 per cent, and public debt is at 112.7 per cent of GDP. And, above all, continuously growing. These numbers, especially the deficit numbers, need correction. But without a government and with a parliament split in three, it is difficult for any future executive to make it. That is why Marine Le Pen's reassuring words yesterday were enough to calm the markets.
The market gives the impression of remaining wait-and-see. 'We have entered uncharted territory for French policy,' observes Manuela Maccia, Cio Italy at Deutsche Bank. 'Barnier had proposed a sustainable path for the deficit, with the goal of bringing it to 3% in 2029. Now we have to see what the new budget law will look like and what room for manoeuvre the next government will have'. Nothing to wrap your head around, yet. "Also because,' Maccia points out, 'today the France-Germany spread is high, but yields are lower than they were last June when the political crisis began, thanks to the ECB cuts. The rating agencies are also waiting but concerned. For Moody's, the no-confidence vote by the National Assembly creates 'a political rift' that 'exacerbates fiscal challenges' because it 'reduces the likelihood of public finance consolidation and contributes to a higher risk premium'. S&P also claims that this situation 'complicates the fiscal outlook'. For now, however, the ratings are not budging.
The contagion in reverse
.However, the markets are moving. The tensions in France can be seen in the fact that the spread between Italian and French government bonds has fallen to its lowest level since 2008, around 30 basis points. And some see parity soon. At the same time, the BTp-Bund spread has fallen to 109 basis points (to the delight of Minister Giorgetti who said 'let's continue like this, it's the right way'). On the contrary: this spread is higher than real, due to the fact that it compares a BTp maturing in February 2035 with a shorter Bund, maturing in August 2034. If the two bonds had the same duration, the market calculates, the Italy-Germany spread would be 100 basis points. Or even just below that.
