French budget: “It will take time” before regaining “full confidence” in the markets, warns the head of the IMF

Trust is lost faster than it is gained. This was recalled by the Managing Director of the International Monetary Fund (IMF), Kristalina Georgieva, who estimated on Wednesday that it “will take time” for France to reduce its debt and deficit to levels that can “inspire confidence” in the markets.

“France is currently seeking to adopt a budget that would place its deficit and debt on a downward trajectory,” she admitted during a press conference on the sidelines of the IMF annual meeting in Bangkok. “However, it will take time to bring them back to levels likely to inspire confidence, complete confidence, both among the population and investors,” she warned.

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The examination of the 2027 budget begins Tuesday in the National Assembly, with the ambition of returning to a deficit of 5% of GDP next year. But its adoption appears very uncertain, due to lack of majority and the approach of the presidential election. However, on the debt market, France is particularly suffering from questions about its economic and political stability: its 10-year borrowing rate is approaching 5%.

Among the “bad students”

More generally, the head of the IMF called on the governments of developed economies to “urgently” restore their budgetary discipline in the face of soaring yields on their debts on the bond market. “Too many countries have not taken advantage of the post-pandemic recovery to rebuild their budgetary room for maneuver, each new shock has caused the level of debt to rise further,” she observed. “This time, the advanced economies are the worst performers.”

“The fiscal foundations must be urgently repaired before the cracks widen. The time has come to increase revenues, rationalize expenditure, improve the management of public finances,” stressed Ms. Georgieva. While the problem is widespread, advanced economies have particularly seen their debt/GDP ratios explode since the 2008 financial crisis, Covid and the wars in Ukraine and the Middle East, with governments forced to increase spending to cushion the shocks.

Mistrust of bond markets

However, from the United States to Europe, via Japan, these countries are now facing distrust from the bond markets: yields on 10- and 30-year American Treasury bonds have reached peaks since 2002, as have French 10-year rates, which are close to 5%. Several factors are at play: energy inflation which pushes central banks to raise their key rates, debt raisings from AI giants which compete with government issues, but also concerns about the budgetary seriousness of States which are allowing deficits and debt to slide.

And developing economies are being hit in turn, warns Kristalina Georgieva. According to her, “rising benchmark policy rates deprive emerging markets and low-income countries of their safety net, putting upward pressure on the cost of servicing their debt.” “A problem that worsens when these countries are particularly vulnerable for other reasons” – conflicts, energy prices or the impact of the El Nino weather phenomenon on food security for example – she argues.