France’s deepening crisis puts Europe on CONTAGION alert: deVere CEO
France’s escalating debt and political crisis now risks spilling across Europe’s bond markets and into global portfolios, warns the CEO of deVere Group, one of the world’s largest independent financial advisory organisations.
The comments from Nigel Green come as France counts the cost of its worst civil unrest in years, with around 550,000 people taking to the streets over the weekend and almost 2,400 arrests, just ahead of a pivotal National Assembly vote on the country’s 2027 budget.
He says: “France has gone from a slow fiscal problem to an acute political one, and markets are reacting accordingly.
“Investors are watching the eurozone’s second biggest economy struggle to pass a budget, keep order on its streets, and give any clear sense of who’ll be running the country after next year’s election.
“Any one of those could be managed on its own. It’s the combination that’s worrying people.”
Prime minister Sébastien Lecornu’s minority government is seeking €54bn of savings to bring the deficit down to 5% of GDP from 5.4% this year. Budget fights have already brought down two of his recent predecessors.
France hasn’t run a budget surplus since 1974. Public debt stands at around 119% of GDP and is forecast to reach 122% next year.
The yield on 10-year French government debt neared 5% earlier this month, its highest since 2002, while the gap over German Bunds hit its widest since the eurozone debt crisis.
Nigel Green says: “France is now paying a serious premium to borrow, and the budget itself was drawn up assuming yields well below where they are today.
“Every month this drags on, servicing the debt gets more expensive, and higher interest bills eat into the very savings the government is fighting to pass.”
When French bonds sold off sharply at the start of October, Italian, Belgian and Greek bonds fell with them, and the euro dropped below $1.12, its weakest level in 17 months.
French debt is also widely held overseas, with Japanese institutions alone holding around $145 billion.
The deVere CEO says: “Contagion is the word I keep hearing now. French government bonds sit in pension funds, insurance portfolios and bank balance sheets right across Europe and further afield.
“If confidence in them cracks, it won’t stay a French issue for long. Italy and Belgium would likely feel the pressure next, because they carry heavy debts of their own.”
France’s troubles are landing at the start of a packed run of European votes.
Spain holds a snap general election on 29 November, France chooses a president next April and May with Marine Le Pen leading many polls, and Italy, Poland, Greece and Finland are all due at the ballot box in 2027, alongside five German state elections.
“Whoever wins in France inherits a very difficult set of numbers, and the same question hangs over every one of these votes,” says Nigel Green.
“Investors want to know whether governments have a credible plan for their debts. Each election between now and the end of next year becomes a moment where that gets tested, and spreads can move sharply in either direction.”
The European Central Bank has so far signalled it won’t step in simply because spreads are wide, seeing the moves as driven by France’s own fundamentals.
He says: “The ECB has the tools, but it’s made clear it wants France to help itself first. If the budget fails and trading turns disorderly, I believe the pressure on Frankfurt to act will become very hard to resist.”
He remains optimistic about where this leads.
“Moments like this tend to force decisions politicians have put off for years. If France gets a budget through and shows it’s serious about its finances, I’d expect spreads to narrow and a lot of the fear to drain out of European markets fairly quickly.
“Europe came out of its last debt crisis with tougher rules and a stronger central bank.
“If it handles France well, it could come out of this one in better shape again, and that would be good news for anyone with money invested in the region.”