France: Sovereign Debt and the Political Crisis.
The Bayrou government will fall on September 8. Macron will try and avoid new legislative elections at all costs. And of course there’s no way he’ll resign as President. He will look for a centre-left PM. He hopes such a PM can split the Socialists (PS) from La France Insoumise before legislative and presidential election in 2027. That immediate outcome means even less fiscal reform. So, France will continue to deteriorate fiscally and economically.
I am short long term Sovereign bonds globally. France falls into that category. But I do not expect that the fall of the Bayrou government will trigger a French (and hence Eurozone) sovereign debt crisis. The ECB has the will and the tools to prevent that. But French yields will continue to rise and surpass those of Italy.
The thing to watch is if Macrons’ manoeuvre fails and there are early legislative elections. Then the Rassemblement National (RN) could sweep to power. That could create a reason to dramatically increase OATS shorts. But for the moment I shall stay where I am and just add some long Italian BTPs to capture the yield differential between French and Italian Sovereign debt