Forget BTPs: Former Spread Guardian Sounds Alarm on These European Bonds

Moritz Kraemer’s Warning on France’s Economic Standing

Once a fierce critic of Italy during the Eurozone sovereign debt crisis, Moritz Kraemer, former head of Sovereign Ratings at S&P Global Ratings, has shifted his attention to France as an alarming sign of economic instability.
Now the chief economist at LBBW, Kraemer’s recent comments have sparked conversations about the shifting perceptions of France’s position within the Eurozone.

Market Concerns and Rising Yields

Kraemer’s warning coincided with increasing yields on French government bonds (OAT), surpassing those of Portugal and even Spain.
This signifies that traders are now viewing France as riskier than Spain and Portugal, which is a notable shift.

In an interview with Bloomberg, Kraemer expressed skepticism about France’s status as a “core” Eurozone country, stating, “The markets do not see France as part of the core anymore.” This reflects a growing consensus that, due to unsustainable public finances and political turmoil, France might soon be considered a peripheral market within the Eurozone, joining the likes of Italy.

Public Debt Crisis

The root of the problem lies in France’s deteriorating public finances.
The European Commission forecasts that France’s debt-to-GDP ratio will rise from 110.6% in 2023 to 113.8% by 2025, unless significant reforms are implemented.
What was once seen as a model of fiscal virtue, alongside Germany, now faces constraints from the EU’s excessive deficit procedure, similar to Italy’s situation.

Political Instability and Reform Challenges

Compounding these issues is France’s political chaos.
Under Prime Minister Michel Barnier, the government struggles with a minority status reliant on tenuous support from other parties.
The inability to implement necessary reforms raises concerns about sustainable economic growth and fiscal recovery.

The Risk of ‘Bond Vigilantes’

Investors are increasingly wary of French OAT bonds, with RBC Brewin Dolphin’s Paul Davis indicating potential intervention from “bond vigilantes”—a term originating in the 1980s to describe investors who protested government fiscal mismanagement.

Political Earthquakes and Bond Market Reactions

As the threat of populism recedes, the current government’s fragility could still provoke adverse market reactions, possibly worsening the OAT-Bund spread.
The question remains: could political instability lead to a collapse of OAT values? Recent history suggests that political turmoil has already caused investors to seek safety in German Bunds, inflating OAT yields and signaling distrust in France’s fiscal management.

Conclusion: A Shift in Trust

Despite a recent minor improvement in OAT yields, France’s image as a reliable economic power has undeniably diminished, prompting traders to favor other Eurozone nations over France.