France’s Liz Truss moment is yet to come – and it may be worse

Fights over the budget and a growing debt problem promise a difficult autumn.

The French finance minister Bruno Le Maire warned last month that a win by Marine Le Pen’s National Rally (RN) could trigger a sell-off of French government bonds. The hard right’s policies would spook the bond market, Le Maire suggested, and warned that “a Liz Truss scenario is possible”.

There was a whiff of Project Fear (with notes of le sexisme) to these comments, and on the face of it the cafouillage du Truss did not appear. The yields on French bonds had indeed jumped (meaning the market considered French debt riskier) when Emmanuel Macron called his surprise election in early June. By late June the spread (difference in yield) between French and German bonds (which are perceived as very safe) had risen to the highest point since the 2012 European debt crisis. The market for French bonds settled somewhat on 8 July when it became clear that the hard right had failed to win a majority in the second round of the election, although yields remain high.

That does not mean, however, that a crisis has been averted. In France, as in Britain, the surge in yields was one point in a longer-running trend in how the bond market prices the country’s debt. For France, the peak is yet to come – and it may be harder to scale.

The most likely point for une catastrophe à la Truss is October, when the new French government will propose a new budget, which it will need to pass into law by December. These have been difficult to pass lately; Macron’s government scraped through two no-confidence votes last year after pushing through a law to raise the retirement age to 64.

This autumn, a precarious coalition government, which will of necessity include left-wing parties that together won the most number of seats in the 8 July vote and that have offered their voters policies such as lowering the retirement age and increasing the minimum wage, will somehow have to agree on how to deliver those policies while reducing France’s deficit and its ballooning debt. If the arithmetic doesn’t add up – and it is very hard to see how it will, in a country spending 11 per cent of its GDP on interest payments – demand for French government debt will fall, yields will rise still higher. At this point parts of the French financial system will come under pressure.

In the UK, this was what toppled Liz Truss: not the change in bond yields or the fall in the pound, but the arcane pieces of financial plumbing that suddenly began to cost pension funds hundreds of millions of pounds, threatening their stability. The mechanism might not have been widely understood, but the public were suddenly aware that Truss and Kwasi Kwarteng had made it much harder to get a mortgage, and had put their retirement savings at risk.

In France, retirement savings are concentrated in Assurance Vie accounts with insurance companies, which invest the money in funds known as “Fonds en Euros”, which buy European bonds and commit to pay guaranteed returns. Volatility in the bond market could make it harder for these funds to cover their liabilities, says Claudia Panseri, chief investment officer for France at UBS Global Wealth Management: “The insurance system will be under pressure.”

However, there is an added complication for France.

When the Truss-Kwarteng event detonated in the UK economy, pension funds and mortgage holders were pulled back from the brink by the Bank of England, which bought time for the government to change course by committing to purchase up to £62bn in government bonds. France might not have the same option.

On 19 June the EU warned that it would open an Excessive Deficit Procedure (EDP) against France for breaking the bloc’s deficit rules. An EDP is a set of recommendations that require tighter spending, backed up by a fine of 0.1 per cent of GDP per year (about $3bn, in France’s case). However, the really serious part is that if a country doesn’t follow its EDP recommendations, the European Central Bank might not bail it out with its bond-buying programme. France’s financial institutions might not be able to rely on the same lifeline as Britain’s.

It’s likely that French voters will be every bit as happy about their politicians playing fast and loose with their retirement savings as British voters were; Panseri says the moment at which the savings of French people come under pressure will likely be the “tipping point” at which the market forces an abrupt change of policy.

In Britain, the Truss episode opened the door to a calmer and more serious government, but this may not be the case in France. If voters are told that the policies they voted for have been rejected by the market, and that investors and central bankers outside their borders have decided that they will, in fact, have to work longer and for less money, they will likely respond with angry populism. The autumn will bring interesting times for France.