Global Market: France faces rising market pressure to rein in public finances

France is coming under growing pressure from financial markets to put its public finances on a more sustainable path, with little room for policy mistakes ahead of next year's presidential election, Citadel's head of Economic Research for Fixed Income & Macro Angel Ubide told Reuters.

French borrowing costs have risen sharply during the global bond selloff, while the euro has weakened as investors increasingly worry that the country's fragile fiscal position could create wider risks for the eurozone.

Ubide said France does not currently represent a systemic threat to Europe, but its size means that a severe deterioration in its finances could have significant implications for the wider region.


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He said market pressure could help force policymakers in Paris to focus on controlling spending and restoring confidence in public finances. France will also need parliamentary elections to produce a government capable of implementing measures to curb the deficit, according to Ubide.

The turbulence in French government bonds has raised concerns that financial stress could spread to other highly indebted euro zone economies and weigh further on the euro. European Central Bank policymakers and France's finance minister have so far ruled out the need for the ECB to intervene to stabilise French bond markets.

The yield on France's 10-year government bond briefly climbed above 5% last week, reaching its highest level in 24 years. At the same time, the euro fell to a 17-month low below $1.12 on Monday and weakened against sterling, the Swiss franc and the Japanese yen.

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Election Adds to Fiscal UncertaintyFrance is heading toward its presidential election amid growing political and economic tensions. Student protests, rising prices and pressure on household finances have added to voter dissatisfaction, benefiting both far-right and far-left parties in opinion polls.

Far-right leader Marine Le Pen sought to strengthen her economic credentials on Tuesday by pledging to significantly increase planned spending cuts if elected. She said she would seek €140 billion ($157.6 billion) in savings over a five-year presidency and proposed using a referendum to enshrine deficit reduction in the constitution.

Economists speaking to Reuters have questioned whether savings on that scale could realistically be delivered, particularly given uncertainty over how Le Pen would reconcile the proposed cuts with her position on lowering the retirement age for some workers.

For financial markets, uncertainty over the policies of a potential Le Pen government remains a key concern. Ubide said investors were still assessing how her economic programme would evolve and that it would take time for markets to form a clearer view, Reuters reported.

France's fiscal challenges therefore come at a sensitive political moment, with rising borrowing costs increasing the urgency for credible deficit-reduction plans while the approaching election makes politically difficult spending decisions harder to implement.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)