Following Macron’s call for a snap election in France, James Briggs, corporate credit portfolio manager at Janus Henderson Investors gives his view on markets and the effect the election may have on the country’s debt metrics.
He said: “As markets digested the implications of different scenarios for France’s political future, risk aversion has plagued the French bond market. The 10-year Franco-German government bond spread widened to levels seen during other risk off events, such as the Covid pandemic and 2017 European Presidential election – but not to levels seen during the 2012 eurozone crisis.
“This reflects elevated political risk exacerbated by the fears around France’s management of its precarious debt situation. Following the call of the snap election, Moody’s warned that its current “stable” outlook on France’s rating could be cut to ‘negative’ if its debt metrics worsened further. This follows S&P’s downgrade last month, highlighting the government’s missed goals in plans to restrain the budget deficit after huge spending during the Covid pandemic and energy crisis.
“This has been reflected in credit universe where increased leverage in corporates has seen France grow from the second largest to the biggest participant in the ICE BofA Euro Corporate Index, with its share up from 16% at the end of 2000 to 23% at the end of 2023.
“Dislocations were also seen in France’s corporate credit universe, particularly in banks and utilities. Banks are particularly affected by fear sentiment, but wider sovereign spreads also influence fundamentals such as the cost of funding and bond portfolio valuations.
“We believe that the impact for French banks may be mitigated by the benefits of diversification and more international business models than some of their Eurozone peers. More substantial spread widening than we have seen could create selective opportunities.”
