Unprecedented. Investors are already charging France more interest than Italy.
Investors are already charging higher interest rates to lend money to France than to Italy, something unprecedented in the history of the eurozone and at a time when France is mired in a political crisis, with its economic prospects worsening. Interest rates on French debt have previously exceeded those of Portugal and Greece.
The National Assembly rejected the motion of confidence presented by François Bayrou, and the French president has already announced that he will nominate a new prime minister in the coming days. He will be France's fifth prime minister in less than two years.
The change that took place this Tuesday was due to technical issues: the French bond that serves as a benchmark now has a longer maturity than the Italian bond, a few months longer, but analysts point out that it marks the continuation of a trend that began several years ago and comes at a time of great pressure for Emmanuel Macron.
Historically, Italian bonds have rewarded investors more due to the greater economic and financial risks associated with Italy. At the peak of the sovereign debt crisis in 2012, Italian interest rates were four percentage points higher than those in France. In 2022, the spread reached two percentage points. But the stability of Giorgia Meloni's government has led markets to invest more in Italy, in line with the country's efforts to consolidate its debt.
"The expectation is that the next prime minister will stay. For investors, the big concern is that the electorate won't form a clear majority and doesn't seem concerned about the budgetary deterioration," according to Elliot Hentov of State Street Investment Management, quoted by Bloomberg.
For Lloyds' Sam Hill, "expectations for a quick resolution of France's political and budgetary problems are likely to remain constrained," he said, noting that French bonds will remain under pressure.
"Block everything." French vow to take to the streets amid political crisis
François Bayrou resigned after his confidence vote failed in Parliament. The veteran centrist tried hard to unite the National Assembly, but to no avail. Bayrou, 74, saw the confidence vote fail. He tried to get the political parties to assume their responsibilities in what he considers to be France's salvation, but to no avail.
Now, Emmanuel Macron will announce a "new prime minister in the coming days," the Élysée Palace announced late Monday afternoon. Macron's resignation doesn't appear to be on the table, contrary to what the opposition has been arguing.
The French are already preparing to take to the streets in protest. The "Bloquons Tout" (Block Everything) movement, which originated on social media, is preparing for nationwide protests on Wednesday, September 10th. September 18th is the day for unions to take to the streets in protest.
"There is no favorable scenario, there is no way out, there is no credible scenario where the same level of fiscal consolidation is achieved," Frederik Ducrozet of Pictet Wealth Management told Reuters.
In turn, Russel Mathews of RBC BlueBay Asset Management, who is betting against French bonds, believes that there is a growing reluctance in the markets to believe that increasing the tax burden is a viable way to reduce large budget deficits.
Markets reacted on Monday, with the euro rising slightly to $1.1735. French bonds and stock futures were also up over 1%. It remains to be seen how the market storm will play out in France in the coming days, with investors keeping a close eye on the range between French and German long-term debt yields.
French Finance Minister Eric Lombard has already announced that the next budget – to be presented on October 7 – will be less ambitious than that of François Bayrou, known for being a debt hawk.
The idea will be to focus more on tax increases and less on spending cuts to reduce the budget deficit, in agreement with the French Socialist Party, which could even be the next prime minister.
What are the names on the table?
One possibility is Defense Minister Sebastien Lecornu, more centrist, or Finance Minister Eric Lombard, a technocrat with ties to the left.
Another name is the leader of the Socialist Party (PSF) Olivier Faure, who has already admitted his desire to take office, but the conservatives of the Republican Party have already warned that they will abandon the Government if the left takes power.
Bloomberg points to other names such as Justice Minister Gerald Darmanin, who joined Macron's party in 2017.
If cuts aren't made now, French debt could reach 125% of GDP by 2030, an increase of 10 percentage points from the current level, according to a Bloomberg Economics estimate. The country has the largest budget deficit in the eurozone.
The French National Assembly rejected the motion of confidence in François Bayrou's government: 364 votes against and 194 in favor. Result: François Bayrou will resign on Tuesday morning.
It's a defeat for French President Emmanuel Macron, with the fall of his fourth prime minister in the space of two years. François Bayrou took office just nine months ago.
Regarding Bayrou's debt-cutting plan, it remains to be seen how the markets will react in the coming days, which are likely to severely punish France. The French president will have to act quickly and convincingly.
It was a near-impossible mission: trying to bring together the far right, far left, and center-right and left-wing parties. The goal is to cut €44 billion in spending next year, reduce the deficit, which is almost double the 3% permitted by the EU, and reduce the debt burden, which already stands at 114% of GDP.
But the opposition parties aren't resting on their laurels, and are already planning to capitalize on the political chaos to try to boost their position in the 2027 presidential elections.
Two sources familiar with Macron's thinking do not believe that an election will resolve the crisis. The key may lie with the French Socialist Party, which has already presented proposals to create a 2% tax on fortunes over €100 million and savings of €22 billion, which could conflict with Macron's agenda.
The French are already organizing. Unions are beginning to plan protests. A newly formed movement promises to take to the French streets on Wednesday under the slogan: "Bloquons Tout" (Let's block everything).
What now, Macron? The president could nominate a politician from his party, Renaissance, or from the conservative Republicans. Alternatively, he could try to please the left and nominate a technocrat or a socialist.
However, it seems impossible to please everyone. Macron could also decide to call elections, dissolving Parliament for a second time, but so far he has resisted calls from the far-right National Rally or the far-left France Insoumise.
In his speech before the vote, the prime minister said that controlling France's debt is a "matter of life or death" for the country.
"The biggest risk is not making decisions. We are dealing with a historical, not a political, issue that will affect future generations. If we had the production of our neighbors, France wouldn't have a deficit problem, but production is a national emergency," said François Bayrou in a speech to the French Parliament on Monday.
"The vital issue, the issue of life and death, where our very survival is at stake, is the issue of controlling our spending, the issue of over-indebtedness," he added, as quoted by Reuters.
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