$110 Oil Prices Collide with Fiscal Stalemate! France's Debt Risk Premium Hits a 15-Year HighIs a New "Euro Debt Crisis" Looming?

Title context: $110 Oil Prices Collide with Fiscal Stalemate! France's Debt Risk Premium Hits a 15-Year HighIs a New "Euro Debt Crisis" Looming? Text: France is currently under heavy pressure from both energy inflation and fiscal credit strains. As the global crude benchmarkBrent crudesurged past $110 and European natural gas futures rose about 4% to their highest since December 2022, the spread between French and German 10-year government bond yields widened to as much as 159.4 basis points, a 15-year high; after the French 10-year yield rose above 5%, the euro also weakened in tandem. Second-quarter public debt reached 119% of GDP, and the government plans to cut the deficit ratio from an estimated 5.4% this year to 5% next year. However, in Paris and across France, public outrage over the rising cost of living and cuts to public services and social welfare has triggered sustained violent protests and riots, with localized curfews in Paris and other placesfurther increasing resistance to the French government's deficit reduction. The European Central Bank raised its deposit rate to 2.50% in September; a Reuters poll in October showed economists' mainstream expectation of a pause on October 29 and another 25 basis point hike in December, while interest rate futures market pricing on the 21st still pointed to an ECB rate hike in December. From this it appears that energy inflation continues to push up euro-area long-term government bond yields and the future rate outlook, while declining fiscal consolidation credibility continues to increase France's market risk premium; the trajectory of high rates and high yields is gradually raising the refinancing burden, yet deficit reduction is constrained by social pressure. Market trading focus is increasingly concentrated on whether budget planning can restore credibility, and whether fiscal deficit and sovereign debt pressures spread to large commercial banks' asset portfolios and financing systems. Oil Rises to $110, Budget Worries Deepen, French Government Bond Risk Hits 15-Year High As rising energy prices intensify concerns about France's fiscal outlook, a gauge of the risk on French government sovereign bonds has risen to its highest level in 15 years. The extra yield that fixed-income investors demand to hold 10-year French government bonds rather than German bonds of the same maturity rose by as much as 6 basis points to 159.4 basis points. This spread is seen as a key gauge of credit risk in the euro area. Since late September, the spread has widened sharply as doubts grow over whether France can push through a budget to address its debt burden. Over the weekend, public anger over the cost of living turned into violent protests, further aggravating concerns. "The spread may remain under pressure as attention shifts back to the upcoming budget vote," said Pooja Kumra, senior rates market strategist for the UK and Europe at TD Bank in Toronto. "Even if the budget passes, investors remain worried about broader fiscal malfunction and signs of political fragmentation." As shown in the chart above, France's government bond risk gauge continues to soarthe borrowing premium of the French government bond market relative to Germany is approaching 160 basis points. On Wednesday, rising energy prices further drove sharp volatility in European bond markets, with European benchmark natural gas futures up about 4% and Brent crude once again above $110 a barrel. Earlier on Wednesday, Deutsche Bank Chief Executive Christian Sewing said France's fiscal and political instability is cause for concern and that market volatility could persist into next year's presidential election. The French 10-year government bond yield rose above 5% for the first time since 2002. The euro lagged most Group-of-Ten currencies, falling as much as 0.2% to $1.1214 per euro. France's parliament is deeply divided, and reaching a compromise on next year's budget to get the relevant bill passed is becoming a difficult process. With only six months until the presidential election, this process is unlikely to get any easier. Historical MirrorThe Old Transmission of the Euro Debt Crisis In the previous euro debt crisis, the financial crisis exposed Greece's fiscal misreporting and real estate and banking risks in some countries; falling government bonds damaged banks, and government bailouts of banks further increased debt, while austerity and recession further worsened debt-servicing capacity. Bailout mechanisms, Greek debt restructuring and the ECB's 2012 pledge to defend the euro gradually contained the panic. The "PIIGS" refers to the five European countries Portugal, Italy, Ireland, Greece and Spaina Wall Street derogatory term for five European economies with lower sovereign debt credit ratings. However, the country that could trigger a new round of the euro debt crisis this time is not the "PIIGS" that have long lagged at the bottom of the European economy, but France, Europe's second-largest economy. As Europe's second-largest economy, the size of France's government bond market has a far greater impact on the entire European and global economy than the "PIIGS" that sparked the euro debt crisis fourteen years ago. More and more investment institutions worry that continued heavy selling of French government bonds and its spillover effects could trigger a new round of euro depreciation crisis and euro debt crisis that shocks global financial markets. Looking back at the previous euro debt crisisit began in 2009 when Greece sharply revised up its fiscal deficit, and the post-financial-crisis recession and bank bailout burdens further exposed member states' fiscal vulnerabilities, with pressure then spreading to Ireland, Portugal, Spain and Italy. Falling government bonds weakened bank assets and financing capacity, and bank bailouts further increased government burdens, forming a "sovereign-bank vicious cycle"; fiscal austerity further depressed growth. Market confidence only gradually recovered after European bailout mechanisms were gradually established, especially after then-ECB President Draghi pledged in 2012 to defend the euro "whatever it takes" and the ECB launched its conditional Outright Monetary Transactions (OMT) tool. The progress of this French government bond market selloff and fiscal credit crisis is not yet sufficient to determine that a full-scale crisis is repeatingEuropean banks currently have stronger capital buffers, and the ECB has the Transmission Protection Instrument (TPI), but intervention must assess fiscal and debt sustainability and is not an unconditional backstop. The real signal of an escalation of France's fiscal and government bond crisis is when the wave of French government bond selling and the budget stalemate evolve into a euro-area liquidity crisis triggered by commercial banks' government bond portfolios and obstructed financing processes, which then transmits through banks to other member states.