France pays market price as Germany wins plaudits
Fears that the eurozone debt crisis could hit even the stronger member countries means that France has been forced to pay higher rates to raise fresh funds in the financial markets, analysts said.
They said that investors buying government bonds want to see France make the extra effort to get its public finances under control, like Germany, Europe's powerhouse economy which has just announced an unpopular austerity programme.
Apart from a spending freeze, Paris has so far not adopted an austerity plan per se. Instead, it has prided itself on supporting the economy through the worst of the global slump despite the cost -- a budget deficit blowout to eight percent of Gross Domestic Product.
In contrast, German cuts of 86 billion euros (100 billion dollars) by 2014 will put the country on course for zero deficit -- beating the three percent limit that eurozone members have so conspicuously failed to observe up to now.
Such moves have only bolstered Germany's gold-plated reputation for financial probity and put the market spotlight on other countries, such as France, challenging them to follow suit.
In the marketplace, benchmark German 10-year government bonds currently yield 2.560 percent while the French equivalent pays investors 3.015 percent.
The yield spread -- the difference in return on the two bonds -- is the widest since 2009, reflecting how investors will pay more for the perceived lower risk of German assets in the fallout from the Greek debt crisis.
"The markets began by going over the last in the (eurozone) class, Greece, and then have gone up the pecking order, so even if you are well ranked, it finally gets to you," said Bruno Cavalier, chief economist at Oddo Securities.
Analysts said that while Germany always enjoyed a premium ranking over its European peers, Berlin's readiness to wield the budget knife has only made it a more attractive investment in troubled times.
For the markets, the "German plan is more serious, more rigorous," said Philippe Martin, professor at Sciences Po university in Paris.
France may be getting the message as Prime Minister Francois Fillon Saturday announced the state would slash spending by 45 billion euros (54.5 billion dollars) over the next three years to get the country's public deficit under the European Union's limit of three percent of GDP.
"We've made a commitment to bring down our deficit from eight to three percent by 2013 and we will concentrate all of our efforts on it," Fillon said at a meeting of new members of his UMP party.
At the same time, the French finance ministry is mindful that the growth outlook for 2011 is uncertain, so the government has to be careful not to take any measures that could undercut the current modest recovery, analysts say.
But the markets want to see action and have been fretting over what has appeared to be a lack of political will in Paris to take the stiff medicine adopted in Germany.
It is a problem that may get worse in the run-up to the 2012 presidential elections.
"To say, 'it will be better tomorrow,' as France has done for the last 10 years is no longer possible," said Cavalier of Oddo Securities. "Investors just won't have the patience to wait until 2012," he added.
Besides deficit reductions, the markets will be looking carefully at key French pension reform plans to be announced next week, analysts said.
Professor Martin believes the government "will try to do the minimum," coming back to the issue again if that fails to do the trick.
France still enjoys the support of international investors -- even if at a higher price than Germany -- and its bond yields are historically low while its top credit rating does not seem in any immediate danger.
"For the moment, there is no risk of a ratings downgrade but the pressure could increase," said Nordine Naam, bond strategist at French investment bank Natixis.
© 2010 AFP