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Investors price France's presidential race into 81-basis-point default swaps
France's five-year default swaps rose to 81 basis points on Friday as its 10-year yield hit 4.989%, the highest since 2002. Macquarie's Thierry Wizman calls outright default unlikely but puts the odds of a budget-straining National Rally presidency near 50%.
The Investor · Invest desk
What happened
- France's premium over equivalent German 10-year yields widened to 152 basis points on Friday, the most since the euro-area debt crisis of 2011.
- France's debt is expected to climb to 122% of GDP next year from 119% this year.
- The government's latest plan failed to halt the rise in bond yields because investors doubted its credibility.
- Marine Le Pen, who leads the presidential polls, has proposed tax cuts and vowed to bring the retirement age down to as low as 60.
- Scope Ratings cut France to A+ from AA- last month, putting its rating on a par with Fitch and S&P Global Ratings.
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Why it matters
- cost If Friday's 152bp premium held across next year's planned issuance, France would pay about $5.8 billion a year more than German rates on that debt alone, for the life of each bond.
- constraint Scope expects fragmentation to persist past the 2027 election, so the vote alone does not clear a path to the consolidation needed to stabilise French debt.
- contradiction Fortune describes the RN as the likely runoff winner while Wizman puts an RN presidency near 50%, so the premium is paying holders for an outcome that is far from settled.
A default swap and a bond spread answer different questions. The spread is what France pays over Germany to borrow [3]. The swap is the price of insurance against France not paying at all [5]. Take the 152 basis points out of Friday's 4.989% French 10-year yield [2] and the German equivalent sits near 3.47% [1], so Paris was paying about 44% more than Berlin for a decade of money [2]. On Thursday, Thierry Wizman, Macquarie's global FX and rates strategist, said French default insurance already cost more than that of any other major EU country or Britain [5]. He wrote that "the signal from France CDS pricing is that the OAT/Bund spread widening is due to higher sovereign default risk in France" [6].
His next paragraph pulls the other way. "But our instinct is to also read the suddenly widening OAT/Bund yield spread as a 'guilty' verdict on the recent direction of France's presidential politics," Wizman wrote [8]. Then he put odds on it: "As such, an outright default may be a low-probability event, but an RN-led presidency, with an adverse influence on the 2028 budget and credit-risk perceptions is a high-probability event, near 50%" [7].
If the National Rally loses the runoff, a chance Wizman's own figure puts near even, there is no RN budget to price [7]. If it wins, its 2028 budget lands on a debt ratio already climbing 3 points of GDP in a single year [3], a deficit of about 5.4% of GDP [9] and growth projected at 0.5% this year [15]. Buyers could also leave before either happens. Vanguard's Ales Koutny told the Financial Times that demand for debt in markets at the center of geopolitical issues "can disappear in times of crisis," and called France "long-term degrading credit" [17].
The other side of the runoff offers lenders no relief. Jean-Luc Melenchon is campaigning on having the central bank cancel its holdings of French debt [12]. "But in France, neither the populist Left nor the populist Right are fiscal hawks," Wizman wrote [21].
I think the swaps are charging for deterioration and not yet for default. Holders of French paper collect a 152-basis-point premium over Bunds [3] against a near-even chance of an adverse 2028 budget [7]. Koutny's warning is the case against that view. If demand goes, a low-probability default stops being the risk that matters, because France plans to sell more than $380 billion of medium- and long-term debt next year at whatever price buyers set [16].
The two measures can settle it. If the spread stays wide while the swaps fall back, the widening is about who will hold French bonds; if the swaps keep climbing with the spread, Wizman's CDS reading is right. Both later came off their Friday highs [4].
What to watch
- Whether Fitch or S&P Global Ratings move France below the A+ level that Scope's cut brought it to.
- Demand at the first auctions of France's medium- and long-term borrowing programme next year, the direct test of Koutny's warning.
- Campaign rhetoric on debt and default; Wizman says the presidential campaigns have barely begun and expects it to heat up.