How Geopolitics Affects France’s Current Political and Fiscal Crisis, and Is a Bond Crisis on the Horizon?

Many countries occupy the headlines at present but France seems to be an interesting case now that the finance chief in Paris, Eric Lombard, mentioned that the country might have to resort to the IMF should it finances deteriorate further.

In short this is incorrect as the European Stability Mechanism would be the first line of defense to prop up the need to access euros.  The European Central Bank would also factor into the mix.  France needs euros.

But how does the larger topic of geopolitics affect France’s risk profile, especially as it relates to our ICRG methodology?

Geopolitics affects France’s budget by influencing the cost of debt, government spending on defense and security, and the overall economic climate through political instability. Political uncertainty can raise the cost of government borrowing, as seen with the recent widening spread between French and German government bonds and may increase the burden of defense spending as France pursues “strategic autonomy” in a complex geopolitical environment. Geopolitical instability also directly impacts the economy by creating uncertainty that can suppress consumption, investment, and ultimately tax revenues, leading to larger budget deficit.

These sorts of factors all affect our risk metrics, including those we look at involving various socioeconomic conditions (consumer confidence and unemployment levels), the country’s investment profile (access to hard currency and payment delays), and issues involving external relations with other countries (largely as it affects Ukraine and European defense)

A related question asked by our client is whether things can get so politically uncertain after the government falls that President Macron finds it difficult or impossible to name a new prime minister to form a new government and that this translates into fiscal paralysis to the extent the is a bond crisis in France. 

France’s rising debt load, currently 114% of GDP, is high but the risk of bond-market stress is moderate, according to the IMF. That is in part because the French government would need to generate a relatively small fiscal surplus correct its debt-to-GDP ratio.  That would require the “primary surplus” to be 1.2% of GDP – according to various sources – which is less than the 3.5% of GDP required by Greece’s creditors during the euro crisis over a decade ago.

CHRISTOPHER MCKEE, PHD CHIEF EXECUTIVE

Christopher McKee is PRS’ CEO and Owner. An international political economist, global investor, entrepreneur, and author, Chris received his PhD from Queen’s University (Canada) and has been involved in the field of geopolitical risk, limited recourse financing, and private sector development for the past 25 years.