(Dec 19): France could face a market backlash if plans to repair the public finances fail to bring its deficit within 5% of economic output next year, the country’s central bank chief said.
“Beyond a 5% deficit, France would clearly put itself in danger,” Francois Villeroy de Galhau said in an interview with Le Figaro. “The apparent calm of the markets can, in my experience, turn abruptly.”
France is heading into the end of the year with little chance of parliament adopting a full budget. The government has warned that portions of finance bills so far approved would only bring the deficit to 5.3% of economic output in 2026, down from 5.4% this year.
While the Bank of France governor hasn’t shirked from highlighting fiscal risks in the past, his remarks do point to a degree of alarm at the lack of progress at a time when the country remains under scrutiny from investors.
Still, financial markets have been relatively calm in recent weeks as the failure to agree on a budget wouldn’t necessarily trigger another government collapse and France can rely on emergency legislation to roll over vital taxes and spending.
See also: Bank of France lifts growth forecasts as economy defies upheaval
The yield premium on France’s 10-year bonds compared to German peers is about 70 basis points, after rising to over 89 in October.
Villeroy said markets can suddenly shift if there is a sequence of events including a clash with the European Union over fiscal policy, more ratings downgrades or the withdrawal of hedge funds.
“It is all the more important to avoid this rise in French interest rates — our spread — as it would also affect businesses, as well as households through their mortgage loans,” Villeroy said.
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