Eurozone Refuses Direct Rescue as France's 10-Year Yield Nears 5% on Budget Stalemate
Eurozone finance ministers meeting in Luxembourg on 8 October urged France to pass its 2027 budget quickly, but ruled out any direct rescue of French bonds, according to Reuters and the Eurogroup's Kyriakos Pierrakakis. The French 10-year yield has climbed to near 5%, a level not seen since July 2002, while the ECB's Christine Lagarde said its Transmission Protection Instrument carries strict conditions that France does not currently meet, per Seoul Economic Daily and Europe Says.
Bottom line — France's budget deadlock and April 2027 presidential election leave Paris, not Frankfurt or Brussels, responsible for restoring bond-market confidence.
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ING Think says the French government's draft budget would cut the 2027 deficit to 5% of GDP from a projected 6.5%, but public debt would still rise to 121.7% of GDP, too high to stabilise it.
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ING Think expects the budget to pass in a modified form, most likely through Article 49.3 of the constitution, which lets the government adopt a bill without a formal vote, after weeks of negotiation.
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According to ING Think, the OAT-Bund spread had already topped 130 basis points at the time of writing, up 46 basis points since early September, and could test 150 basis points.
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Seoul Economic Daily, citing Bloomberg, reports that 38% of French corporate bonds now trade at higher prices than French government debt, an eighteenfold increase since the start of the year.
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ING Think argues that the ECB's TPI criteria would at minimum require the French budget to be fully adopted, and that early intervention could be read as monetary financing of a country unwilling to follow the rules.
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Europe Says reports one senior eurozone official answering 'no' when asked whether the Commission or ECB would act, adding that 'everyone should do their own job.'
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ING Think estimates that the bond yield surge since the ECB's September meeting has a similar effect on growth and inflation as a further 25 basis point rate hike, according to its own calculations.
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Europe Says notes that France has kept its deficit below the EU's 3% ceiling only six times since the euro's introduction in 1999, and that some officials see bond-market pressure as the only force likely to drive consolidation.