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French borrowing costs surge on Macron wage rises, tax cuts

French borrowing costs surge on Macron wage rises, tax cuts
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By Abhinav Ramnarayan

LONDON (Reuters) – France’s 10-year borrowing costs climbed to their highest level compared with Germany in a year and a half on Tuesday, as French President Emmanuel Macron announced spending measures in a bid to restore calm after weeks of violent protests.

Macron announced wage rises for the poorest workers and tax cuts for pensioners late on Monday, measures that are expected to increase public spending by 8 billion to 10 billion euros.

France’s 10-year bond yield rose by five basis points to 0.756 percent on Tuesday. The spread over equivalent German bonds <FR10YT=RR> <DE10YT=RR> hit 47.5 basis points, its widest level since May 2017.

“The measures suggest there will be more spending from the French government, which implies a higher deficit in 2019 and weakens the financial position,” said Commerzbank rates strategist Rainer Guntermann.

“French newspapers are suggesting this morning that we could have a 3.5 percent deficit in France in 2019, which complicates the discussion in the euro area and gives other countries such as Italy an argument for a higher deficit.”

The French newspaper report in question, which cited officials as saying the measures could push the country’s budget deficit to 3.5 percent of gross domestic product, does not take into account any spending cuts or tax increases that may be announced.

Asked whether the budget deficit would be kept below the euro zone’s limit of 3 percent of GDP, an Elysee official said France had some room on spending if a one-off tax rebate, which inflates the deficit by 20 billion euros in 2019, was not taken into account.

The European Commission earlier this year rejected Italy’s draft budget, which provided for a deficit of 2.4 percent of GDP in 2019, up from 1.8 percent this year.

The European Commission is willing to accept an increase in Italy’s deficit target to 1.95 percent for next year, the newspaper La Repubblica said on Tuesday.

Italy’s 10-year government bond yields were up four basis points at 3.13 percent on Tuesday <IT10YT=RR>. The spread over Germany widened to 287 bps.

Other euro zone bond yields were 1 to 3 bps higher across the board. <NL10YT=RR> <ES10YT=RR>

Another underperformer on the day was Ireland, with the gap between 10-year Irish bond yields and those in benchmark Germany hitting its widest level in six months at 68 basis points on Brexit uncertainty. <DE10IE10=RR>

This came after British Prime Minister Theresa May on Monday postponed a parliamentary vote on her Brexit deal to seek more concessions but the European Union refused to renegotiate and lawmakers doubted her chances of securing big changes.

Ireland will ramp up its plans for a no-deal Brexit including accelerating the recruitment of 1,000 customs officials and veterinary inspectors to work at ports and airports, Foreign Minister Simon Coveney said on Tuesday. [L8N1YG1RW]

(Reporting by Abhinav Ramnarayan; editing by Larry King, Richard Balmforth)

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