🚨 🇫🇷 🇩🇪 The France-Germany 10-year spread is now close to 100 basis points, its highest level since 2012. Not a sovereign debt crisis yet but markets are starting to treat French risk as a structural issue. 🇫🇷 Back on 2012, investors were questioning whether some countries could leave the euro or restructure their debt. Today, markets are not pricing a French default but a deficit higher than 5% of GDP, a debt that keeps rising, and a political system struggling to credibly correct the fiscal trajectory. 📈 The problem is not only the spread but also the absolute level of rates. When the German Bund was around 0%, a French spread of 50 or 80 basis points was relatively painless. Today, France is borrowing at more than 4.5% over 10 years. Debt previously issued at 0%, 1% or 2% will gradually have to be refinanced at much higher rates. Not an immediate shock because the average maturity of French debt is long (around 8 years) but it creates a form of progressive fiscal suffocation with more interest payments, less room for everything else, so more taxes or spending cuts are required. 🛢️ The current rise in oil prices is accelerating the French problem. Higher energy prices mean more inflation, a more restrictive ECB, higher long-term yields and weaker growth. For France, this means slower growth, weaker tax revenues and higher financing costs. 🗳️ Then there is the 2027 election. Who will actually have the political capacity to reduce the deficit ? Raising taxes significantly looks difficult, cutting spending materially is politically uneasy, and political instability makes the adjustment even harder. As long as markets do not see a credible fiscal path, the French risk premium can remain elevated and even rise further. France is not in a debt crisis today but markets have started making it pay for its fiscal imbalances. *Bloomberg link:

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