French borrowing costs surge on wage rises, tax cuts

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Agnes Pannier-Runacher, French Economy Junior Minister, speaks during the questions to the government session at the National Assembly in Paris, France, November 27, 2018. REUTERS/Gonzalo Fuentes

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

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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 yesterday, before easing to around 0.73 percent. The spread over equivalent German bonds hit 47.5 basis points, its widest level since May 2017.

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“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.

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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 yesterday.

Italy’s 10-year government bond yields were up four basis points at 3.13 percent yesterday. The spread over Germany widened to 287 bps.

The news on government spending comes at a time when business and economic sentiment in the single currency bloc is at an ebb.

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