According to veteran investor David Roche, France’s borrowing costs are still “exploding” compared to Germany’s, reflecting political and economic realities following France’s parliamentary elections.
But former European Central Bank President Jean-Claude Trichet told CNBC that despite the current uncertainty, he believes a “coalition of ideas” will form to break the deadlock.
French bond markets remained relatively calm after Sunday’s runoff vote, which handed the left-wing New Popular Front coalition a surprising victory. France was left with a deadlocked parliament as no single party or coalition won an absolute majority.
Diffusion between French and German The 10-year Treasury yield was around 70 basis points on Wednesday, down from a 12-year high of 85 basis points on June 28 and up from 49 basis points before President Emmanuel Macron shocked the nation by calling a snap election. French debt has historically traded at a premium to German debt, but the gap has reached levels not seen since the European debt crisis of the early 2010s.
Bond yields move inversely with prices and represent changes in the government’s borrowing costs. They also represent long-term investor confidence in the economy.
David Roche, president of Quantum Strategy, said market experts could have expected the spread between French and German government bonds to “explode” to 120 basis points, given the new French government’s slim chance of reducing the country’s budget deficit to comply with EU rules.
“But nothing actually happened. Now, I think it will,” Roche said Tuesday on CNBC’s “Squawk Box Europe.”
“In effect, political paralysis in France leads to economic paralysis in France, and economic paralysis in France puts France on a trajectory that directly contradicts what it has been doing in Europe,” he said.
In a Sunday note, Roche recommended shorting French government bonds against German bonds, a bet that the asset’s price will fall.
According to Roche, the French National Assembly, its various factions and President Macron now face a long-term political battle that has led to a lack of economic leadership.
Along with the economic growth outlook, the key thing investors should watch is France’s massive budget deficit and high debt-to-GDP ratio of 110%. The European Commission warned last month that France and other countries were breaking fiscal rules.
“Eventually it will come home with the euro. To be honest, if you compare Italy and France, Italy will look like angels. But they are not angels, and France will look like devils,” he continued.
Roche said the political deadlock would give the far-right Rassemblement National a chance to step back and criticize, strengthening the position of its longtime leader Marine Le Pen to run for president.
He added more broadly that if France had a “populist, selfish and narcissistic government”, “Europe would go nowhere”.
“All the big projects that need funding at the community level are not going to get funding at the community level. I’m talking about expansion, I’m talking about green projects, I’m talking about rebuilding Ukraine. There are about seven major pillars that are suddenly going nowhere. That’s devastating for Europe,” Roche told CNBC.
There is no room for maneuver
Former Bank of France governor Jean-Claude Trichet is now optimistic that politicians will find a way forward together through coalition talks, meaning there will be no deadlock and no risk of a domestic or Europe-wide debt crisis that would require intervention by the European Central Bank.
Trichet said the left-wing New Popular Front’s policies were “very risky” from an economic point of view, but since it had failed to secure a majority of seats, any risks posed by them were now just “theoretical scenarios” that “will not come to fruition”.
“If there is a long-term deadlock, of course, there is no freedom to move forward… My personal assessment is that once it has been proven that none of the current groups can lead the country, then there will be negotiations,” Trichet told CNBC’s Charlotte Reed, suggesting a possible “ideological coalition.” The best-case scenario, the former Bank of France governor added, would be for the government’s right-wing République and its left-wing Party Socialist to make decisions.
“We cannot have a country like France without a government, or with a government that does nothing,” he said.
