Weekend protests across France drew about 550,000 people, according to a CNBC segment summary, and parts of the demonstrations turned into riots that damaged buildings and shops. On Monday, the unrest added to fears about the country’s debt, and Paris-listed stocks, bonds and the euro fell. On CNBC, host Sara Eisen said the turmoil shows how hard it will be for any French government to cut spending.
Why Bond Investors Are Getting Nervous
A bond yield is the return investors demand for lending to a government, and when yields rise, borrowing costs the government more, and each new euro of debt France sells takes more to service. That leaves even less room in a budget that is already stretched.
“French government bond yields are up sharply. And I think, David, it highlights the fact that the protests and the demonstrations underscore how hard it is going to be for any government to cut back on public spending at a time where they need to, because debt has ballooned,” Eisen said.
The pressure has been building for weeks. Earlier this month, CNBC reported that the IMF chief issued a stark warning to France over surging bond yields.
France’s Debt Numbers Show How Little Room Is Left
The CNBC segment put French government debt at about 120% of GDP. Debt-to-GDP compares what a country owes with what its economy produces in a year, so a reading above 100% means the debt is larger than a full year of output. The segment also cited unemployment of 8.3%, youth unemployment of 21.6% and an approval rating of 15% to 18% for President Emmanuel Macron.
“France is worse right now as a percent to GDP,” Eisen said. The segment presented this as France’s deficit now running above Italy’s, which for years was seen as Europe’s fiscal problem child.
Put together, these numbers trap France in a loop. Heavy debt and deficits call for spending cuts. Mass unrest and an unpopular government make those cuts close to politically impossible. So bond investors demand more to keep lending.
Faber Says the U.S. Holds Advantages France Lacks
Co-host David Faber compared France with the United States: “We have growth. We have. And our unemployment rate is about half of what theirs is. And we have better ability to borrow because we are the reserve currency and people still want our debt.”
The official U.S. unemployment rate was 4.2% in September. Real GDP grew at a 2.2% annualized pace in the latest reported quarter. A reserve currency is one that central banks and investors around the world hold in large amounts for trade and savings. Because the dollar plays that role, demand for Treasuries stays steady. That demand still has a price: on October 16, the 10-year Treasury yielded 5.09% and the 30-year yielded 5.43%.
Eisen’s Warning on the Welfare State
Eisen then gave her own view on what France’s situation means for the wider policy debate: “France does not have that. They have relied on public spending. And I think that that’s actually a warning for those that are saying that socialism would be a better model, because the welfare state is not cutting it right now.”
That is Eisen’s opinion. Economists and politicians still disagree about how to fund social programs. Even so, the standoff in France shows how hard public spending becomes to cut once voters depend on it.
Could France’s Crisis Spread Across Europe?
“The combo, I think, of the political problems, the economic problems, the fiscal problems and the unrest is making for a dangerous combination. And you see that play out in the markets right now, the euro is weaker. And I think that also raises the question of whether this can spread beyond France and whether it’s a bigger problem for Europe,” Eisen said.
Contagion happens when stress in one country’s markets spreads to others, because investors sell similar assets or rethink risk across a whole region. On Monday, the Wall Street Journal reported that French contagion is less virulent than in the previous eurozone crisis. The euro’s October 16 close against the dollar was lower than its closes through much of September.
What France’s Debt Scare Means for U.S. Investors
A European debt scare can reach American portfolios in a few ways. International stock funds often hold large French companies, and a weaker euro shrinks the dollar value of those holdings. U.S. multinationals with big European sales also bring home fewer dollars when the euro falls. Global bond markets are linked as well. Monday’s headlines showed French yields rising while Treasury yields fell, as some money moved toward U.S. debt.
France’s cycle feeds itself: more debt calls for cuts, unrest blocks the cuts, and lenders charge more. The open question Eisen raised is whether the strain stays inside France or spreads into a wider problem for Europe.