Markets will keep shaky French regime on a leash

In a bind. France’s debt problem would be hard to tackle even if Emmanuel Macron h been a popular president supported by a comfortable parliamentary majority. current stalemate, with united left coalition and centrist parties fighting to form next government, makes it harder. And next government will have anor awkward partner: bond market.

Whoever will end up governing France will inherit a country with a budget deficit and public debt at 5% and 112% of GDP respectively last year. political stasis could le to fiscal insouciance. A minority or coalition government led by New Popular Front left grouping may want to implement at least part of its platform, which includes 100 billion euros of extra spending by end of 2025. And even if a centrist-led government emerges, led by Macron’s Renaissance movement, it may suspend 20 billion euros of savings that current finance minister Bruno Le Maire h pencilled in for this year.

new regime’s first problem will be to abide by European Union’s requirement to shrink country’s debt. Paris could ignore EU’s concerns, but it would risk penalties, and suspension of some 10 billion euros of subsidies remaining from pandemic-era Recovery and Resilience Plan.

And political games wouldn’t help France with bond markets. Paris is vulnerable to changes in investors’ sentiment, with 54% of government debt in foreign hands — up from under 50% two years ago. European Central Bank still holds around 20% of French sovereign debt, providing a cushion in case of a market sell off. But France can’t count on furr central bank support if it doesn’t comply with EU requirements.

That leaves France at mercy of investors who could worry about its ability to bring down a debt lo that has doubled in last 20 years. To stabilise it, Paris would need to cut its deficit before interest costs from current near-3% of GDP to below 1%, according to a Breakingviews calculation assuming borrowing costs of around 3% and nominal growth of 3.2% in 2025, based on International Monetary Fund estimates. It has managed that just once since 2008. most likely scenario is a fragile government allowing debt to continue drifting upwards.

Investors remained calm after Sunday’s vote, relieved that neir far right nor left obtained a majority. Paris, however, still has to pay a premium of more than 65 basis points over German debt to borrow for 10 years, up from below 50 basis points before election. That looks low given Spain, with less debt lo and faster growth, pays around 80 basis points. Wher or not yields shoot higher is for France’s future government to decide.