(Bloomberg) — French bonds edged higher, even as investors braced for a period of protracted volatility following the collapse of Michel Barnier’s government.
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Markets had been expecting the ouster, and 10-year French notes slightly extended their gain on Thursday, lowering the yield to 2.88%. The premium investors demand to hold French debt over safer German notes fell to 81 basis points, while the euro advanced 0.3% to $1.0542, outperforming most of its Group-of-10 currency peers.
An extended period of political wrangling is in the cards after a dispute over next year’s budget led far-right leader Marine Le Pen and a left-wing coalition to push through a no-confidence motion against Barnier’s administration on Wednesday. President Emmanuel Macron now needs to find a new prime minister who can steer a 2025 budget through a deeply divided parliament.
“We should expect sustained uncertainty and volatility for a while,” said Marie Jacot, Edmond De Rothschild Asset Management France CEO in an interview with Bloomberg TV. “We think it’s likely to be very difficult for President Macron to continue to govern.”
The outgoing administration will continue in a caretaker capacity for the time being, allowing the government to avoid a US-style shutdown. Once named, a new prime minister will propose a cabinet, appointed by the president, and then has to send a new 2025 budget bill to parliament.
The bill initially presented by Barnier’s government contained €60 billion ($63 billion) of tax increases and spending cuts that aimed for a sharp adjustment in the deficit to 5% of economic output in 2025. The gap is forecast to widen to more than 6% of gross domestic product this year — double the limit under the European Union’s rules.
“We are pessimistic on the outlook for the French deficit,” Alex Everett, an investment manager at abrdn, said Wednesday. “Continued malaise, a dearth of decision making and insufficient progress toward debt sustainability would likely see French spreads move toward 100 basis points over Germany.”
The latest political drama that has roiled French markets kicked off in June when President Emmanuel Macron called snap legislative elections that resulted in a hung parliament. Since then, the euro has tumbled and the spread on French notes has almost doubled to reach 90 basis points last week, the highest since the euro-area sovereign debt crisis.
“The recent developments in France only compound the headwinds for the nation and the European Union in general,” said Bill Campbell, a portfolio manager at DoubleLine Capital.
