This indicator reflects investors’ growing concern about the vote on the finance law (PLF) and the future of Michel Barnier’s government.
The warning signs are multiplying. The gap between interest rates on the benchmark 10-year bond between France and Germany reached its highest level since 2012 on Tuesday, a sign of growing investor concern over the budget vote and the future of Michel Barnier’s government.
The French ten-year government bond yield was at 3.05% at around 1720 GMT and its German equivalent was at 2.18%. The gap, called “diffusion”thus amounts to 0.87 percentage points, which is unprecedented since 2012. However, this rate difference “it constitutes an indicator of choice to measure the trust placed in France compared to Germany and its prospects” economical, explains John Plassard, investment specialist at Mirabaud. “In question, the finance bill, rejected in the Assembly, has begun its examination in a public session in the Senate”he continued.
The formal vote in the Senate is scheduled for December 12. Then seven deputies and seven senators will try to find a compromise on the budget during a joint commission (CMP). If they succeeded, the final version of the text seems promised at 49.3 at the time of its return to the deputies, and therefore at a motion of censure examined around December 20th. For the markets, “The question is whether or not the National Rally (RN) will abstain from the vote of confidence”explains Marine Mazet, pricing strategist at Nomura. “The parties of the center and the right will vote for Michel Barnier, the New Popular Front (NFP) against, and the RN will find itself the kingmaker”predicts.
“The French political situation poses a problem” et “with the pressure that the Navy exerts on the government”A “The censure motion appears to be an increasingly likely outcome for the markets”agrees Aurélien Buffaut, bond manager at Delubac AM. In this context, know “how many compromises will Barnier make and how much will it cost” is a cause for concern for investors, summarizes Marine Mazet. If the government falls at the end of December, “Political and fiscal instability will worsen at a time when there is little liquidity in the markets, which could give rise to exacerbated movements”the strategist explained in detail.
Germany is certainly also facing a political crisis, given that Olaf Scholz’s coalition exploded at the beginning of November. But the country “it has, unlike France, a large margin for budgetary manoeuvre, which allows us not to frighten the markets”explains Mabrouk Chetouane, head of market strategy at Natixis IM. On Friday, France will have a meeting with the Standard and Poor’s rating agency, which will have to decide on the country’s rating.
This assessment comes at a time when Paris is still the subject of an excessive deficit procedure with the European Commission. With a sharply declining public deficit, expected this year at 6.2% of gross domestic product according to Brussels, France shows the worst performance among the Twenty-Seven, with the exception of Romania, and remains very far from the 3% ceiling allowed by the EU rules.
What are the key economic indicators to monitor during the debate on the French finance law?
Interviewer (Time.news Editor): Good afternoon, and thank you for joining us today! With a lot going on surrounding the upcoming vote on the finance law, we’ve seen some alarming indicators in the market. Can you explain what these indicators are and why they are significant right now?
Expert (John Plassard, Investment Specialist at Mirabaud): Good afternoon! Absolutely. One of the most telling signs is the widening gap between the interest rates on French and German 10-year government bonds—the highest it’s been since 2012. This discrepancy of 0.87 percentage points suggests that investors are increasingly worried about France’s economic stability compared to Germany.
Editor: That’s an interesting point. Investor confidence appears to be dwindling. What exactly is feeding this sentiment?
Expert: The driving force behind this concern is the ongoing debate around the finance law, particularly after its initial rejection in the Assembly. As it moves to the Senate for examination, the future of Michel Barnier’s government hangs in the balance. This political uncertainty can significantly impact market perceptions and investor sentiment.
Editor: You mentioned the formal vote in the Senate scheduled for December 12. What are the potential outcomes, and how could they affect the markets?
Expert: The outcome of that Senate vote is crucial. If they manage to reach a compromise during the joint commission, we could see the final finance law returned to the deputies with some modifications. However, if it’s pushed through using the 49.3 procedure—a constitutional mechanism allowing the government to pass legislation without a vote—it could lead to a censure motion around December 20. Should the National Rally abstain from voting, they could be positioned as a pivotal player in this political landscape, possibly stabilizing or further destabilizing investor trust.
Editor: And what are the implications if the National Rally decides to take action on the confidence vote?
Expert: Exactly. Their stance could be a game-changer. If they choose to abstain, it might give Barnier a lifeline, allowing his government to proceed while still facing opposition. However, if they actively vote against him, we could see heightened instability, leading to increased volatility in the markets as investors reassess their positions towards French assets.
Editor: The situation certainly sounds precarious. With the parties aligned as you mentioned, what should investors be looking out for in the coming weeks?
Expert: Investors must remain vigilant. The trajectory of the finance law debate, the behavior of the National Rally, and the broader political context will be key indicators of economic sentiment. Additionally, we should monitor how the bond market reacts to these developments, as widening spreads may signal deepening investor concerns.
Editor: It seems we are on the brink of a critical juncture. Thank you, John, for shedding light on this complex situation. Any final thoughts for our audience?
Expert: Just to reiterate, while the next few weeks are crucial, maintaining a diversified portfolio and staying informed will be essential for navigating this uncertainty. Thanks for having me!
Editor: Thank you for your insights! We’ll be following this story closely as events unfold.