(Bloomberg) -- A measure of France’s bond risk fell amid hopes lawmakers will strike a deal on next year’s budget sooner than many investors had expected, ending months of political impasse that has weighed on markets.
The extra yield investors demand to hold 10-year French notes over safer German peers dropped as much as seven basis points to 77 basis points, the lowest in two weeks. The move was compounded by losses in German bonds as demand for haven assets waned, as well as low trading volumes.
Far-right leader Marine Le Pen said in an interview with Bloomberg TV that a budget could be delivered in “a matter of weeks” so long as the next prime minister is prepared to narrow the deficit more slowly. Le Pen’s party on Wednesday voted to topple Michel Barnier’s government and investors had been bracing for a long period of political instability until a new budget plan is agreed on.
“A relief rally was always possible,” said Robert Dishner, senior portfolio manager at Neuberger Berman. “Ultimately the risk is spreads re-widen due to supply concerns.”
Le Pen also said there was no case for President Emmanuel Macron to resign. Speaking later in Paris, Macron said he would serve out his term, which ends in 2027, and name a new prime minister in the coming days who can prepare a new budget by early next year. But any new leader will likely face the same financial squeeze that brought down the previous administration, and there is a lot of skepticism among investors over how quickly the various parties can reach a deal.
“I would not read too much between the lines,” said Benoit Gerard, a rates strategist at Natixis SA. “Yes, we can have a budget quickly, if the new government minds complying with the National Rally requirements. Not sure they will get much support from the central bloc.”
The outgoing administration will continue in a caretaker capacity for the time being, allowing the government to avoid a US-style shutdown that brings most services and spending to a halt. Once named, a new prime minister will propose a cabinet, appointed by the president, and then has to send a new 2025 budget bill to parliament by Dec. 21.
S&P Global Ratings said in a statement on Thursday that it sees a “low” chance of an amended 2025 budget plan to be passed by the deadline in December. The firm, which rates France at AA- with a stable outlook, added it sees “considerably less” fiscal consolidation after Barnier’s government fell.
“Whoever the new PM is, the same fragmented parliament remains,” said Peter Goves, head of developed market debt sovereign research of MFS Investment Management. “Should PM after PM after PM continue to fall, further questions are likely to be raised about how to navigate the political impasse.”
Sharp Adjustment
The bill initially presented by Barnier contained €60 billion ($63 billion) of tax increases and spending cuts that aimed for a sharp adjustment in the deficit to 5% of economic output in 2025. The gap is forecast to widen to more than 6% of gross domestic product this year — double the limit under the European Union’s rules.
While Barnier made some concessions recently, he didn’t fully meet the demands of the far-right party, ultimately leading it to join forces with the left to support a no-confidence vote in the government. Le Pen said on Thursday the plan was not credible for the country and a “reasonable trajectory” is needed, based on wealth creation and savings.
France’s political drama kicked off in June when Macron called snap legislative elections that resulted in a hung parliament. Since then, the risk premium on French notes has almost doubled to peak at 90 basis points last week, the highest since the euro-area sovereign debt crisis.
“There is plenty of bad news already priced in,” said Felipe Villarroel, portfolio manager and partner at TwentyFour Asset Management. “We don’t think Barnier’s removal is any worse than a scenario where he stayed in place at the expense of the budget deficit being addressed.”
(Adds Macron comments in fifth paragraph.)
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