French Bonds Among Eurozone's Riskiest

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The sovereign bond market of the Eurozone has undergone significant transformations over the past yearRecent statistics indicate that Cyprus, Spain, and Croatia now exhibit lower investment risks in their bond markets compared to FranceThis shift in the financial landscape is underscored by the rising yields on French 10-year government bonds, which reflect an increasing concern regarding the fiscal stability of the Eurozone's second-largest economy.

France, once a cornerstone in the Eurozone's economic framework, has become somewhat of an anomaly amidst this changing environmentWhile the overall yields in the Eurozone have seen a notable decline, France stands apartFrank Gill, an expert in sovereign bonds and the General Manager for Standard & Poor's in Europe, the Middle East, and Africa, highlights this distinction, noting that "France is a significant exception."

This exceptionality arises at a time when several so-called "peripheral" countries of the European Union, including Portugal, Spain, and Greece, have begun to reclaim financial stability after being burdened with immense debt since the 2008 financial crisis

Currently, many of these nations are contending with deficits that are falling below those of France, propelled by low inflation and robust economic growth that place their debts on a sustainable path.

The investor sentiment towards France has been notably pessimistic, especially considering the political upheavals that have prevented the country from passing a new 2025 budget by year-endA transitional law remains in place, allowing public sector workers to receive salaries and taxes to be collected until the new budget is approvedConsequently, investors anticipate that France's deficit will remain slightly above 6% of its GDP in 2024. To manage its financial obligations, France will need to persist in borrowing from the market, which raises concerns that its debt, currently at 112% of GDP, will continue to inflate.

In the near term, the absence of a clear fiscal policy and a sustainable debt management strategy in France has introduced a level of uncertainty that likely hampers the expected decline in yields by 2025. Gill notes, "I believe that the French OAT (Obligation Assimilable du Trésor) market may experience fluctuations next year, heavily influenced by the 2025 budget

From now until 2027, absent significant adjustments, the debt-to-GDP ratio will keep rising." This outlook suggests that France's upcoming fiscal policy direction and debt management strategies will be pivotal in determining the trajectory of its sovereign bond marketShould the nation fail to rein in the growth of its debt and enhance fiscal transparency, there is a risk that government bond yields may remain elevated or even continue to rise further.


Following Moody's downgrade of France's credit rating, the market reacted swiftly, with French 10-year bond yields soaring to 3.05%. Gill pointed out, "Since last December, the actual borrowing costs for France have not much changedIn December, the borrowing cost for 10-year bonds was around 2.75% to 2.8%." This indicates that despite an increase in yields, the fluctuations in France's real borrowing costs have remained relatively stable, although the apprehension regarding France's debt risks lingers.

Germany finds itself in a similar bind with political uncertainty and signs of economic contraction

However, Gill remains optimistic, asserting, "I do not see any significant credit risks for GermanyThe debt-to-GDP ratio is not alarming, and there is considerable fiscal leeway." Germany, as the Eurozone's economic powerhouse, benefits from a solid industrial base and strong competitiveness in global manufacturingDespite facing both political and economic challenges, Germany's fiscal standing remains relatively robust, characterized by a reasonable debt structure and considerable savings surplus that provides a sturdy buffer against economic volatility.


Both France and Germany, as the Eurozone's leading economies, confront a myriad of mid-term fiscal and political challengesNonetheless, they retain considerable advantages in terms of their economic structures and financial systemsFrance boasts a highly liquid banking system with relatively minimal exposure to sovereign debt risks, which mitigates the chances of a sovereign default

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