Global Market: French bond selloff raises debt concerns across Europe amid social unrest

A deepening selloff in French government bonds is raising concerns about borrowing costs across Europe's heavily indebted economies, as mounting fiscal pressures and growing social unrest threaten to unsettle financial markets, according to a report by Reuters.

French 10-year government bond yields climbed above 5% on Thursday to their highest level in 24 years, pushing the premium over benchmark German Bunds to nearly 180 basis points, the widest since the height of the euro zone debt crisis in 2011, the report stated.

France's substantial fiscal deficit, political deadlock in Paris and escalating civil unrest have intensified investor concerns about the country's ability to bring public finances under control. The mounting pressure is also spilling over into other highly indebted economies, including Italy and Belgium, while Greece remains vulnerable to a broader reassessment of European sovereign debt risks.


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Italy, Belgium Face Rising Borrowing Costs
Italian government bond yields have risen by 14 basis points this week to 4.616%, approaching three-year highs reached in early October. Meanwhile, Belgium's 10-year bond yield premium over Germany widened to 109 basis points, its highest level in 14 years.

Belgian borrowing costs rose by as much as 12 basis points on Thursday to 4.54%, their highest since early 2012. The cost of insuring against a Belgian sovereign default also climbed to nearly 39 basis points, its highest since April 2020, highlighting growing investor unease.

The report stated that Belgian credit default swap spreads, which reflect the cost of protection against a debt default, have more than doubled over the past month, matching the pace of deterioration seen in France.

Belgium's longstanding debt burden and history of political paralysis are adding to concerns about its ability to implement the spending cuts and fiscal adjustments needed to stabilise public finances.

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Political Uncertainty Compounds Fiscal Pressures
France's difficulties have revived broader concerns about the sustainability of public debt across the euro zone. Investors are increasingly focused on whether governments can manage their deficits as borrowing costs rise and existing debt must be refinanced at higher interest rates.

Mike Bell, head of market strategy at BlueBay Asset Management, told Reuters that persistently elevated borrowing costs could gradually increase refinancing expenses, placing additional pressure on government finances.

Although Bell does not expect French bond spreads to reach the extremes recorded by Italy and Spain during the euro zone debt crisis, he warned that the premium over German bonds could exceed 200 basis points if political uncertainty and concerns about fiscal discipline intensify.

The risk is particularly pronounced in France, where political divisions could make it harder for the government to secure support for measures needed to put public debt on a sustainable path.

Italy's Debt Outlook Faces Election Risks
Italy has also returned to the spotlight despite a strong performance in its bond market in recent years. Italian yields fell below French borrowing costs in September last year for the first time since the euro zone debt crisis, reflecting improved investor confidence.

However, an election scheduled for next year is raising questions about Rome's ability to reverse the increase in its already substantial public debt, analysts said.

Prime Minister Giorgia Meloni has also approved tougher anti-riot measures following unrest in several northern Italian cities, including Milan, as per the report.

The protests highlight the political challenges facing European governments as households contend with higher energy costs, expensive housing and persistent cost-of-living pressures.

Social Unrest Adds to Market Anxiety
Social tensions are becoming an increasingly important factor in the outlook for European sovereign bonds. Belgium witnessed student demonstrations over high housing costs at the weekend, while Italy has also experienced protests linked to broader economic grievances, the report stated.

These developments are adding to investor concerns that governments may struggle to implement unpopular fiscal reforms at a time when households are already under financial pressure.

Marc Ostwald, global economist at ASM Investor Services, told Reuters that fuel prices, housing costs and broader cost-of-living pressures remain major public grievances, despite the resilience demonstrated by many developed economies.

The combination of elevated borrowing costs, political uncertainty and social unrest could complicate efforts to reduce deficits across the region. For investors, the central question is whether governments can restore confidence in their public finances before rising debt-servicing expenses further constrain their policy options.


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