Markets are dreading the outside chance that right-wing anti-immigrant Marine Le Pen could score a surprise victory in France’s upcoming presidential elections, particularly in the wake of Donald Trump‘s huge electoral upset and the pro-Brexit vote in the UK.
So much so that investors have started pushing up French bond yields, which used to trade more like a safe-haven during the height of the eurozone crisis. That’s why the latest outbreak of panic over Greece’s debt sustainability, sparked by a long-run assessment published by the International Monetary Fund, could not come at a worse time for champions of a moderate, integrated and liberal Europe.
As French bond spreads widen versus their German counterparts, seen as the euro zone benchmark, they reinforce European Central Bank President Mario Draghi’s stated intention to keep interest rates at very low levels for the foreseeable future. They also reintroduce public concerns about the long-term viability of the eurozone. Le Pen has vowed to pull France out of the common currency, which would most likely lead to its collapse.
“The rapid widening of French yield spreads over German and Dutch equivalents is so difficult to justify given we do not believe French election odds have materially changed in recent weeks,” write analysts at BMI research.
“The euro and eurozone equities have been broadly stable in recent weeks, but rising intra-eurozone yield spreads are sending ominous signals with regards to investor sentiment amidst elevated political risk and a busy election schedule in 2017.“
The IMF study on Greece’s debt levels appears intended to push the country’s European Union lenders to cut the government additional slack by offering an actual reduction of debt principle, which would make the country’s finances more manageable. This is a sound goal. However, if the document triggers the very crisis it is seeking to avert, one must wonder about its wisdom and timing.
To be clear, the eurozone debt crisis was more of a banking crisis than a sovereign bond crisis, even though it is often portrayed as the latter. It was excessive lending by banks in Northern Europe, including Germany and France, to poorer governments in the south that led to an unsustainable build-up that eventually came crashing down, not, for the most part, runaway government spending.
“Apart from Greece, the nations that ended up with bailouts were not those with the highest debt-to-GDP-ratios,” concluded a memo signed by several highly-regarded economists in 2015.
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