French central bank head warns country at risk of being ‘strangled by interest rates’
Emmanuel Moulin says France can still reassure bond investors despite ‘serious and worrying’ market moves in recent days
Leila Abboud and Sarah White in Paris
The head of the French central bank has warned that the country risks being “strangled by interest rates” if it does not act to clean up its public finances.
Emmanuel Moulin, the governor of the Banque de France, told the FT that the Eurozone’s second-largest economy could win back investor confidence despite the “serious and worrying” moves on sovereign debt markets in recent days.
“France is not Greece during the Eurozone crisis,” Moulin said.
“If it can pass a budget this year to reduce spending and narrow the deficit as the government has proposed, then markets will be reassured by this concrete step of fiscal consolidation.”
“If we don’t act, there is indeed a risk of being gradually strangled by rising interest rates,” he added.
“We have to remain masters of our own destiny.”
Last week, the French government proposed a budget with €43bn in spending cuts and tax rises in a bid to start paring back a wide deficit that is forecast to stand at 5.4 per cent by the end of the year.
But shorn of a majority in parliament, it faces a showdown with opposition parties over unpopular measures such as removing automatic inflation-linked increases to pension benefits and partly freezing salaries of civil servants.
Borrowing costs have been rising globally, including on US Treasury bonds and across the Eurozone, as rising energy prices caused by the Iran war have pushed up inflation.
Record sovereign and corporate debt issuance has also put upward pressure on global bond yields.
French yields have risen the most out of any G7 bond market since the Iran war began because investors are worried about the government’s inability to control the deficit and political uncertainty ahead of a looming budget battle and next year’s presidential election.
A sell-off in French debt deepened last week, driving yields on 10-year government bonds close to 5 per cent on Friday before they fell back on Monday to 4.86 per cent.
Spreads between the French and German 10-year bonds — a metric closely watched by investors to reflect risk premium — also briefly climbed above 1.5 percentage points.
Analysts have begun speculating about whether the European Central Bank would step in to address widening spreads out of concern over a potential “fragmentation” of the bloc’s financial markets.
Moulin said it was not the time to be discussing the ECB.
“The safety net lies closer to home.
It lies in the capacity of the French and their elected representatives to recognise the need to repair public finances,” he added.
The ECB has hiked rates twice in recent months to address inflation triggered by the war in Iran to meet its main mission of ensuring price stability.
The US Federal Reserve increased its interest rate in September.
Both central banks will re-evaluate and announce rate decisions in late October.
“The rise in long-term interest rates, tighter financial conditions and the second energy shock may weigh on demand and reduce the need for further action by central banks,” Moulin said.
Additional reporting by Ian Smith
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