[Edaily Reporter Bang Sung Hoon ] France has found itself in a position where it must pay higher interest rates to borrow money than Greece. This is because France is being treated as a riskier country than Italy and Greece in the government bond market. Although European Central Bank (ECB) President Christine Lagarde has stepped in to calm the situation, forecasts suggest that uncertainty will persist until the presidential election next April.

◇French Debt More Expensive Than Greece’s… Companies Borrow Cheaper Than the Government
According to Bloomberg on the 11th (local time), the yield on 10-year French government bonds was 137.20 basis points (1 bp = 0.01 percentage point) higher than that of Germany on the 9th. On the same day, this spread was significantly higher than those of Italy (109.12 bp) and Greece (93.39 bp) relative to Germany. The risk premium on French government bonds relative to Italian bonds also hit a record high that day.

Although the yield on French 10-year bonds fell to 4.85% after approaching 5% earlier this month, it had been below 4% just two months ago. This is the result of a collapse in investor confidence regarding France’s ability to manage its mounting debt.

Warning signs are also mounting. An increasing number of French corporate bonds are now trading at yields lower than those of government bonds with similar maturities. This suggests that the market has more confidence in companies than in the government. The CAC 40 index has fallen by about 10% over the past two months.

This anxiety is spreading to other countries as well. In recent weeks, the yield spreads on Italian and Greek government bonds have also widened. Since the start of this month, the euro has been weakening against all G10 currencies. This is why fears of a “contagion”—similar to the Greek financial crisis that shook the eurozone 15 years ago—are resurfacing.

France has an economy worth 3 trillion euros (approximately 4,514 trillion won) and national debt totaling about 3.6 trillion euros (approximately 5,417 trillion won). This is about 10 times Greece’s debt in 2010. However, France can still borrow money from the markets, and banks’ capital is more robust than it was in 2010. Europe’s bailout mechanisms are also better equipped.

Michel Sapin, former French Minister of Finance, assessed the situation, saying, “Greece had absolutely no room for fiscal maneuver. We still have some, but it has been significantly reduced,” and added, “This is more of a fiscal crisis than a debt crisis.” He also noted, however, that given the size of France’s economy, “the stakes are much higher.”

◇ Lagarde: “We Have the Means”… Germany and the ECB Lack Leeway
It is also difficult to count on outside help. In Germany, the European Union’s (EU) largest economy, Chancellor Friedrich Merz is struggling amid the rapid rise of far-right forces. The ECB is focused on combating inflation, which has reared its head again. President Lagarde, a former French finance minister, also appears to be on her way out.

ECB policymakers maintain that there is no need to resort to emergency measures. However, it was reported that President Lagarde told European finance ministers at a closed-door meeting last week, “We have the means to stabilize the markets if necessary.” Subsequently, French government bond prices rebounded on the 9th.

Michael Toerer, a member of the German Bundesbank’s Executive Board, warned in a weekend interview with German radio that “while there is currently no systemic sovereign debt crisis, the risks have risen significantly.” French Finance Minister Roland Lesquire repeatedly emphasized that France does not need an intervention akin to the “hand of God.”

Simona Delle Chiaie, chief Eurozone economist at Bloomberg Economics, analyzed that “the ECB’s challenge is to determine where market discipline ends and financial instability begins.”

◇PIMCO “Reduces Exposure”… A Vicious Cycle Until the Presidential Election
Major investors are still pulling out. Pimco, one of the world’s largest bond managers, announced last week that it would maintain its stance of “significantly reducing its exposure” to French government bonds, anticipating that pressure would continue to mount.

Carry trades by hedge funds targeting the yield spread on French government bonds are also fueling price volatility. Authorities, including the ECB, have warned that while hedge funds play a role in absorbing the oversupply of government bonds, they also exacerbate volatility.

Thierry Wizman, a fixed-income strategist at Macquarie Group, noted, “The selling of government bonds and social unrest have fallen into a vicious cycle where they feed off each other through political polarization.”

Student protesters are demanding 10 billion euros (approximately 15.406 trillion won) to improve dilapidated school facilities, among other things. Meanwhile, interest payments on the national debt are projected to exceed 90 billion euros (approximately 135.4131 trillion won) next year, surpassing the annual education budget. Prime Minister Sébastien Le Cornu now finds himself in the same predicament as his two predecessors, who both stepped down after attempting fiscal reforms.

The campaign pledges of leading presidential candidates are also failing to reassure the markets. Marine Le Pen of the far-right National Rally (RN) has promised to drastically reduce the budget deficit to 3.7% of gross domestic product (GDP) next year, but there is widespread skepticism about the feasibility of this plan. Another leading candidate has even raised the extreme idea of debt forgiveness.