France’s ballooning debt, coupled with social unrest getting out of control, is posing a perfect storm in the bond market, and boosting the yield of the 10-year Obligation Assimilable du Trésor (OAT) to levels above 5% for the first time since 2002. Investors’ fears about the French government's inability to present any credible savings plan have boosted fears of a credit crisis halting the recent Euro recovery.
France’s government debt reached EUR 3.596 trillion in the second quarter of the year, 119% of its GDP, and its highest level since the postwar period, with a frail government lacking the parliamentary support to approve any significant savings plan.
The main opposition parties, Lepen’s Far right and Melenchon’s far left, are unlikely to back any initiative aiming to bring public finances under control. Both of them bid their time, expecting to capitalise on the government’s unpopularity to come into power in next year’s elections.
To make things worse, student protests starting a few weeks have spread through the country, leading to violent riots last weekend that has forced the government to impose partial curfews in several cities this week.
French President Emmanuel Macron announced on Wednesday that he is meeting intelligence services as protests are expected to resume on Saturday.
Against this background, the spread between the French 10-year OAT yield and the safer-considered German Bund, a gauge used by the market to measure the country's risk premium, has escalated to 160 basis points, its highest level since the 2009-2011 financial crisis.