France labelled ‘a problem child for the bond markets’

France was last night labelled ‘a problem child for the bond markets’ following the collapse of the government in Paris. As the country reels from another bout of political upheaval, the French ten-year bond yield rose to 3.49 per cent and the euro skidded lower against the pound and the dollar.

French borrowing costs are higher than they are in Greece and close to rising above those in Italy for the first time since 1998. However, they remain lower than in Britain, where ten-year gilt yields of 4.6 per cent are the highest in the G7.

The latest ructions on financial markets came as French president Emmanuel Macron battles a political crisis after his prime minister Francois Bayrou lost a confidence vote on Monday, forcing him out of the job after just nine months. Macron last night named Sebastien Lecornu his fifth prime minister in a little over two years amid a stand-off over the French budget and its spiralling debts. Speaking to the French parliament ahead of the confidence vote, Bayrou described the country’s debt as ‘life-threatening’.

Holger Schmieding, chief economist at merchant bank Berenberg, said France could see its credit score downgraded as soon as Friday when agency Fitch delivers its latest assessment. ‘The policy paralysis in Paris spells trouble for France and Europe,’ he said.

Investors warned the outlook was bleak, with David Zahn – head of European fixed income at Franklin Templeton – saying: ‘France is going to be a problem child for the bond markets for the next 18 months.’ And Kevin Thozet, of French asset manager Carmignac, added: ‘France is the new periphery.’

While French borrowing costs spiked higher, the euro slipped, with the pound peaking above €1.155. Simon Phillips, managing director at travel money firm No1 Currency, said: ‘The outlook for anyone heading to Europe for some autumn sun just got brighter. France’s political turmoil is weighing down the euro, and the pound is starting to recover from a miserable few weeks against Europe’s single currency.

‘The pound’s improving fortunes will help thousands of Brits travelling to Europe get better value on their accommodation and meals out.’ He added: ‘Three years ago, the shoe was on the other foot. Britain went through three prime ministers in autumn 2022 and, in response, the pound plunged against the euro.

‘Now there’s a revolving door at the French prime minister’s palace, and the prospect of political paralysis and mass demonstrations on the other side of the Channel is chipping away at the value of the euro.’