Political Turmoil Hits Bond Market
On Thursday (November 28), the political crisis in France intensified, leading to increased market concerns about the collapse of Prime Minister Barnier's government due to budget negotiations failing. The yield on French 10-year government bonds briefly surpassed that of Greek bonds for the same term, marking a historical first. Although it soon slightly receded, this phenomenon reflects investors' heightened wariness regarding France's political and fiscal outlook.
While the U.S. markets were closed for the Thanksgiving holiday, the European bond market reacted strongly to the uncertainty in France's political scene. France's fiscal deficit this year is expected to exceed 6% of GDP, far above the European Union's 3% cap. The further delay in deficit reduction plans could affect market confidence.
Budget Stalemate: Pressure from Left and Far Right
French Prime Minister Barnier, who took office only in September, is facing the most challenging moment of his career. In navigating a highly fragmented National Assembly, he must secure support from the far-right "National Rally" while avoiding a vote of no confidence instigated by the left-wing coalition.
Barnier's proposed 2025 fiscal budget aims to save 60 billion euros through tax hikes and spending cuts. However, this proposal faced strong opposition from far-right leader Le Pen, who explicitly demands the withdrawal of tax increase plans and has put forward further demands, including linking pensions to inflation, tightening immigration policies, and halting the introduction of new taxes.
Under pressure to compromise, the Barnier government has already agreed to drop the electricity tax increase. But in a social media statement, "National Rally" chairman Jordan Bardella declared victory while emphasizing that more "red lines" needed demarcation. The left-wing coalition is capitalizing on this division, planning to initiate a vote of no confidence as early as next week. If the far-right allies with the left-wing, Barnier's government could face the risk of collapse.
Finance Minister Responds to Market Concerns
Responding to the sharp volatility in the French bond market, French Finance Minister Antoine Armand publicly refuted comparisons of France's economy to Greece. He noted that "France possesses far superior economic and demographic strength than Greece" and stated that the budget plan could still be improved through "responsible cooperation" to prevent the further escalation of fiscal risks.
Outlook and Risks
Time is running out for the Barnier government to secure support from the far-right. Further compromises could slow the speed of France's fiscal deficit reduction, heightening market doubts about the long-term health of the French economy. Meanwhile, the fiscal deadlock and prevailing political uncertainty could further impact the stability of European financial markets. Global investors are closely monitoring France’s next steps and the ultimate direction of the budget plan.
