Angel Ubide of Citadel says market pressure means France must avoid fiscal errors as borrowing costs surge, though he stopped short of calling France a current systemic risk to Europe.
Market pressure has left France with almost no room for fiscal mistakes, forcing Paris to rein in spending ahead of next year's presidential vote, Angel Ubide, head of Economic Research for Fixed Income & Macro at Citadel, said. Citadel manages US$76 billion in assets [www.reuters.com].
Ubide added: "France doesn't pose a systemic risk to Europe - yet," and warned that a systemic problem in France would quickly become one for the whole bloc. He said he hoped policymakers would avoid letting it reach that point.
The Reuters report said France's 10-year bond yield briefly rose above 5% last week, its highest in 24 years. That jump helped drive a selloff in the euro and raised fears of spillovers to other euro-area countries.
Euro zone officials preparing a meeting noted the 10-year yield had climbed nearly 80 basis points since the start of September. They said it reached its highest level since July 2002, at just under 5% [www.reuters.com].
Ubide said it's crucial that parliamentary elections produce a majority able to rein in public finances. He argued the presidential vote alone won't determine France's ability to consolidate the budget.
Markets are already signaling concern about broader contagion. The euro fell to 17-month lows below US$1.12 and other currencies rallied as investors judged that fragile French public finances could affect the wider euro area.
ECB policymakers and France's finance minister have so far said the situation doesn't yet warrant European Central Bank intervention. They argue there's no need for the ECB to step in to stabilise markets for now.
Bank of France head Emmanuel Moulin described the situation as "serious" but said "there is no need to seek the solution in Frankfurt," urging that France get its budget through parliament rather than look to ECB action [www.reuters.com].
Euro zone finance ministers and ECB officials preparing to meet have said their main message will be that France should pass a 2027 budget to calm markets. They stressed that governments are responsible for fiscal stability while the ECB's mandate remains price stability.
Political proposals aimed at cutting the deficit have been floated, including far-right frontrunner Marine Le Pen's pledge of €140 billion (US$157.6 billion) in savings over five years and a constitutional referendum to enshrine deficit reduction. Economists say those cuts would be hard to deliver without more detail and a parliamentary majority to implement them.
France plans to sell a record €340 billion (US$381 billion) of bonds in 2027 to fund the government and refinance COVID-era debt. Officials say investors are sceptical that announced tightening measures could be carried out given a fragmented parliament and the upcoming presidential and parliamentary votes.
Passage of a credible 2027 budget and the formation of a parliamentary majority able to implement it are the next things to watch. Euro zone ministers' and ECB officials' upcoming meetings will put pressure on Paris to show it can deliver that stability.
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