Shock from France’s Fiscal Crisis Spreads to the Euro, Reviving Fears of a Eurozone Debt Crisis

[Financial News] France, a pillar of the eurozone economy, is falling into a fiscal crisis because of excessive government spending, shaking the euro as well.
The deeply divided political establishment is worsening the crisis, churning out populist pledges instead of showing it can contain the turmoil and being shunned by global investors.
The crisis that began in France is poised to spread to neighboring countries and the eurozone as a whole. Its adverse effects, including pressure on the euro, are beginning to emerge.
The Wall Street Journal (WSJ) reported on the 5th (local time) that the sell-off in French government bonds, which began in France, was spreading across Europe and evoking memories of the eurozone debt crisis a decade ago.
As France’s fiscal crisis deepened, yields on its 10-year government bonds approached 5% late last week, reaching their highest level since 2002.
Yields on French government bonds are higher than those on Greek or Italian bonds, from countries that were once at the heart of fiscal crises. France’s budget deficit is the second-largest among major economies, after that of the United States.

France’s debt is approaching 120% of gross domestic product (GDP), posing a risk of ‘gradually strangling’ the economy, as the governor of the Bank of France has put it. The country’s debt-servicing costs are projected to rise 59% by 2030. They have become a major part of the French government’s budget and are expected to exceed defense spending around 2030.
Investors are bracing for the situation to worsen.
Debt taken on and spent during the era of ultra-low interest rates is coming due, but sharply higher rates have increased the burden of refinancing. More than $1 trillion in debt will mature by 2030, and France may have to issue around $380 billion in government bonds next year alone to repay it.
Even investors that had consistently bought French government bonds, including Japanese asset managers, have pulled back.
The political establishment, which needs to get the situation under control, is deeply divided. Prime ministers who tried to stabilize the fiscal crisis by cutting spending have been ousted one after another. Leading potential successors to President Emmanuel Macron are making one pledge after another to increase government spending.

France’s fiscal crisis immediately led to a fall in the value of the euro.
The euro fell below $1.12 on the 5th, hitting its lowest level in 17 months. It also plunged against the British pound, Swiss franc and Japanese yen.
As global investors sold French government bonds and bought German bonds as a safe haven, the yield spread between the two countries’ bonds widened to its highest level since the 2010–2012 eurozone fiscal crisis.
Kit Juckes, Societe Generale’s chief foreign-exchange strategist, said, “Bond selling is more pronounced in assets seen as vulnerable, and selling of the euro is also gaining momentum and spreading.”
Steven Jen, CEO of Eurizon SLJ Asset Management, forecast, “Although the euro is already somewhat undervalued, the euro-dollar exchange rate could fall further if the risk of fiscal-crisis contagion in Europe is not contained.”
Kevin Thozet, a portfolio adviser at French asset manager Carmignac, said, “France has been free-riding in Europe for decades and has been able to get away with lax fiscal management without facing much in the way of penalties.” He added, “That approach worked when people weren’t paying attention, but now people are starting to watch what’s going on.”
[email protected] Lee Seok-woo, International Affairs Correspondent Reporter