French borrowing costs have surged past Greece with rising concerns from investors who are now favouring US assets instead.
Political instability and rising debts have caused borrowing costs in France to rapidly soar. Five-year borrowing costs have reached 2.7%, surpassing Greece at 2.5%. This is a drastic contrast to last year where Paris’s borrowing costs were significantly below Athens.
The French stock market has also taken a hit, with the benchmark stock CAC 40 index plunging by 1.2% on Wednesday. Being one of the most signalling and important stocks in the country, it has raised concerns with investors.
The rising borrowing costs are putting a major strain on France’s wider finances with National Debt projected to rise from just over 110% of GDP last year to 113% next year.
Uncertainty across the political landscape has run high over the past year, with friction over the budget next month.
France’s Prime Minister Michel Barnier is trying to raise taxes by some €60 billion, as well as placing a restraint on spending with the hope that the borrowing rate will be reduced to 5% of GDP in 2025.
However, Marine Le Pen’s National Rally party is threatening to bring down the government with major disputes over the budget.
Mr Barnier’s government is extremely vulnerable to a rebellion due to its minority following a snap election earlier this year. With this in mind, the prime minister has plans to use a certain provision in the French constitution which allows him to pass the budget without a parliamentary vote. Yet, this runs the risk of a vote of no confidence, toppling the government completely.
This in turn is leaving fear among investors of a potential administration collapse, garnering further political uncertainty with US assets becoming more in demand.
At the same time, there is wider global worry over President-elect Donald Trump’s threat of increasing tariffs on Europe.
“Europe is expected to be one of the main losers of ‘America first’ policies, and unsurprisingly we’ve seen outflows from the region tick back up since the election. Most investors seem willing to allocate their next investment dollar to the US over Europe for the foreseeable future,” a Barclays analyst said.
