French Bond Yields Surge as Weekend Riots Deepen Paris Budget Crisis
France's 10-year yield jumped 13 basis points to 4.9% and the CAC 40 fell 1.5% as weekend protests over high prices turned violent. The government asked local authorities to impose curfews, and the prime minister would not rule out a state of emergency.
French markets tumbled on Monday after some of the country’s worst unrest in years added new risk to Paris’s already strained public finances, with the government asking local authorities to impose curfews and the prime minister not ruling out a state of emergency.
Thousands of people were arrested and shops were looted over the weekend during protests over high prices and declining public services, according to Reuters. France, already contending with weak growth and ballooning debt, saw investors sell its bonds: the yield on the 10-year government bond rose 13 basis points to 4.9% on Monday, on track for its largest one-day rise since late September.
The gap between French and German 10-year yields (the extra premium investors demand to lend to France rather than Germany) widened to 146 basis points, its highest in two weeks. Earlier this month the spread reached nearly 160 basis points and France’s 10-year yield hit 4.99%, its highest since 2002, Reuters reported. Yields are now heading back toward that level.
Budget fight and curfews
Investors say France needs to pass a budget bill to rein in its finances, but the protests show how hard that will be, with political jostling ahead of next year’s presidential election adding to the complications. “The fact this is coming after a weekend of protests shows that hopes for reform are in remission,” Hank Calenti, a global market strategist at SMBC, told Reuters.
The central government on Monday asked some local authorities to impose curfews, and Prime Minister Sebastien Lecornu did not rule out declaring a state of emergency, Reuters reported.
Stocks, banks and the euro under pressure
French stocks were the worst performers among major European markets. The blue-chip CAC 40 index fell 1.5%, compared with a 1% drop in broad European stocks. Shares in two of France’s biggest banks, BNP Paribas and Societe Generale, each fell 3%. Carrefour dropped 1.8%, with its chief executive saying the company’s losses from protest damage would run into the tens of millions of euros.
The pressure is spilling beyond France. Italy’s 10-year yield rose 11 basis points to 4.58% on Monday, with investors watching Rome as the first to follow. The cost of insuring French sovereign debt against default also rose: France’s credit default swap climbed 5 basis points to around 82, the worst performance of the day.
The euro slipped 0.2% to 0.3% against the dollar, the pound and the yen.
Ratings agency Moody’s will review France’s credit rating on Friday, a step that could bring a downgrade and add more pressure on the country’s bonds. Analysts at Commerzbank said such a move would only bring Moody’s in line with other rating agencies, so the market impact would likely be limited.
Reporting based on coverage by Reuters.
