Chart of the month: Geography lessons

Including both sovereign and non-sovereign debt, France is the largest debt market in Europe with over $6 trillion outstanding at the end of Q1 (source: BIS). It’s the fourth largest country weight in the bond market accounting for 5% of the global aggregate bond index, so global bond managers can’t avoid taking a view. 

On the corporate side, our portfolio managers are concerned about the structural problems of the European and French economies. French financials are an area of concern as ongoing economic stagnation puts pressure on corporate cashflows. But they haven’t been selling further as a product of the political drama. These are reasonably longstanding views rooted in the poor economic outlook.

When it comes to sovereign debt, the problems of the heavily indebted French sovereign are well known and, we believe, fully reflected in prices. The additional compensations investors demand to invest in French debt has been climbing. Having started the year paying less to issue debt than all its Southern European neighbours, France has been paying more than Portugal since June and more than Spain since October.

In the middle of the Eurozone sovereign debt crisis in 2012, the Spanish Prime Minister gave the world a geography lesson: “Spain is not Uganda” (Mariano Rajoy, June 2023). 12 years later, and it is the French finance minister’s turn: “France is not Greece” (Antoine Armand, November 2024). However, in the eyes of sovereign bond investors, it is now deemed to be a pretty similar risk.

Considering that repricing, we think it is important to put the French debt burden in context: whole economy net worth was EUR20 trillion at the end of 2022 (source: INSEE). In other words, France has lots of debt, but it also has lots of assets. We do not believe that the political situation has fundamentally changed the debt trajectory over the medium-term. That was bad before the surprise summer election, and it is still bad today. France is still the highest rated sovereign among this group enjoying a Aa2/AA- rating. The biggest change is in the spread, rather than the fundamentals.