French sovereign borrowing costs have soared to the highest premium since the eurozone debt crisis amid political turmoil as the government faces the risk of collapse over a planned austerity budget.
The gap between French 10-year government bond yields and their German equivalent ballooned to as much as 90 basis points on Wednesday, the widest level in 12 years, while shares listed on the Paris stock exchange also tumbled.
Reflecting the dangers of a renewed period of political unrest in the eurozone’s second-largest economy, it comes as the prime minister, Michel Barnier, attempts to push through a budget involving €60bn (£50bn) of spending cuts and tax rises despite lacking a working majority in parliament.
Barnier, who was appointed by Emmanuel Macron in September after the snap general election called by the president left France with a hung parliament, warned on Tuesday that toppling the government would trigger meltdown in financial markets.
“There will be a big storm and very serious turbulence on the financial markets,” he said when asked on French broadcaster TF1 what the impact would be if the budget measures did not pass.
As the prime minister attempts to persuade opposition lawmakers to support his government’s measures the French far-right leader Marine Le Pen repeated a threat on Monday to back a censure motion that could bring down Barnier.
The widening of the gap – or spread – between French and German government bonds represents investors demanding a higher premium for the additional risk of holding the debt.
The spread was last wider in 2012, during the height of the eurozone sovereign debt crisis when fears over a Greek default roiled financial markets.
Investors warned the stalemate in Paris risked leading to fresh elections and mounting political turmoil only months after the most recent snap poll called in a shock move by Macron.
“The game of chicken in French politics is weighing on sentiment; will the government fail?” analysts at the consultancy Pantheon Macroeconomics wrote in a note to clients.
“The risk is that the far-left and far-right throw Mr Barnier’s government under the bus for not coming up with a budget they agree with, even if neither of these two factions would ever be able to agree on a new budget in the first place.”
Barnier’s belt-tightening plans come with France’s budget deficit poised to exceed 6% of GDP this year, more than double the EU target.
Under the EU’s so-called stability and growth pact deficits are limited to 3% of GDP and national debt to 60%, although several eurozone member states currently break the rule.
Brussels has placed France under an “excessive deficit” monitoring process alongside seven other member states, including Belgium, Italy and Poland.
Barnier’s plans aim to cut the deficit to 5% next year. The French senate is scheduled to examine the budget bill on Monday. Analysts said if the tax rises and spending cuts were not implemented the deficit could increase to 7% next year.
“This is the level when bond vigilantes start to sniff around,” said Kathleen Brooks, research director at the trading platform XTB.
“The bond market’s concerns are now focused solely on the budget and the size of the deficit. If Barnier’s technocratic government does collapse, this will likely spell the end for his radical, cost-cutting budget. If he does manage to stay in office, then he can use special parliamentary measures next month to force the budget through.”
Macron appointed Barnier, a veteran conservative and the former EU Brexit negotiator, in September after July’s snap elections. The president had gambled that a shock poll could help strengthen his hand after being roundly defeated by the far right in the European parliamentary elections in May.
However, the move backfired, forcing his centrist government to resign, with the lower house of parliament divided into three roughly equal blocs; the left, far right, and centre.
