TheAltExec

🚨 FRANCE IS STARTING TO LOOK LIKE THE NEXT MAJOR CRISIS IN EUROPE. And it is not just about politics. France is now getting hit by a bond selloff, exploding borrowing costs, fuel shortages, violent protests and foreign investors pulling money out. France’s 10-year yield briefly touched 5%, its highest level since 2002. The spread over German bonds has exploded toward 150 basis points, levels not seen since the eurozone debt crisis. France’s 5-year CDS has also surged from around 34 bps in early September to almost 80 bps. That is more than a 130% increase in less than a month. And the fiscal numbers explain why investors are nervous. France is carrying roughly €3.5 TRILLION of government debt. The European Commission expects debt to hit 118.1% of GDP this year and exceed 120% next year, while the deficit remains around 5% of GDP. Now comes the dangerous part. Foreign investors own more than half of France’s government debt. So France needs global investors to keep buying enormous amounts of bonds while confidence in its finances is deteriorating. And one major Japanese investor just walked away. Sumitomo Mitsui DS Asset Management sold its entire position in French government bonds, moving the money primarily into German Bunds and some short term Japanese government debt. Not trimmed. Exited completely. The fund specifically cited concerns about France’s fiscal situation. Japan matters because rising Japanese yields are changing the equation for investors who spent years searching overseas for better returns. Once currency hedging is included, French bonds now offer Japanese investors an effective yield of roughly 3.3%, around the same as domestic Japanese government bonds. Why take French political and fiscal risk when yields back home are becoming competitive? And France’s problems don't stop with bonds. Fuel supply is under pressure again. As of October 4, 12% of French fuel stations were experiencing shortages of at least one type of petrol or diesel, with the figure reaching 20% in Grand Est and 18% in Pays de la Loire. Then there is the unrest. Student protests have spread across France and turned increasingly violent. Around 5,000 people have been arrested in a week. More than 600 police officers have been injured. Schools have been attacked, riot police have clashed with protesters, and the Paris police chief now describes the movement as “out of control.” At the same time, public sector strikes are pushing back against government budget cuts. So look at what is happening simultaneously: 10Y yield: highest since 2002. France-Germany spread: near euro-crisis levels. CDS: more than doubled in a month. Debt: roughly €3.5 trillion. Foreign bondholders: more than 50%. Japanese money: beginning to pull back. Fuel shortages: hitting parts of the country. Protests: thousands arrested. Budget: tens of billions in savings being demanded. And ratings agencies are watching. Moody’s still has France at Aa3 with a negative outlook, with its next rating decision scheduled for October 23. This is what makes the situation dangerous. France has to convince investors to keep financing one of the largest sovereign debt markets in Europe while borrowing costs rise, debt keeps growing and political pressure makes spending cuts harder to deliver. If foreign demand weakens further, France may have to offer even higher yields to attract buyers. Higher yields mean higher interest costs. Higher interest costs make the deficit harder to control. And a harder to control deficit can push investors to demand even higher yields. That is the feedback loop France cannot afford to let start feeding on itself.