Is a new round of the "European debt crisis" brewing? French government bond spreads hit a record highwill the "PIIGS" script play out again in France?

Title context: Is a new round of the "European debt crisis" brewing? French government bond spreads hit a record highwill the "PIIGS" script play out again in France? Text: The most unsettling and profound change in the European bond market today is that France is losing the financing advantage it traditionally enjoyed as a core Western country. On October 9, the yield on France's 10-year government bond exceeded Italy's by 30 basis points, setting a record since the birth of the euro; the spread between France and Germany last week briefly broke through 150 basis points, returning to extreme levels seen during the European debt crisis nearly two decades later. France's 10-year yield has risen by nearly 80 basis points cumulatively since early September, approaching 5%, reaching its highest level since 2002. With fiscal deficits difficult to reduce, budget execution constrained by politics, and the spillover effects of surging 10-year and longer-term U.S. Treasury yields driving up global long-term funding costs, France is being pushed to the center of a European bond market storm. The latest statistics show that global bond investors are demanding the highest extra yield compensation for holding French government bonds relative to Italian government bonds since the birth of the euro, Europe's benchmark sovereign currency. On Friday, the gap between the two countries' benchmark 10-year government bond yields reached a record 30 basis points. Until last year, Italy was still considered the riskier party in the two countries' government bond markets, with borrowing costs higher than France's. Now, investors are punishing France because it is cutting its budget deficit by less than expected, and there is no sign that its debt-to-GDP ratio of 117.6% will decline. Fund managers are also demanding higher yields to compensate for political uncertainty ahead of next April's presidential election, when the far right and far left may face off. Meanwhile, Italy's years of difficult fiscal austerity have reduced government debt levels and boosted economic growth, and its government bonds have therefore been rewarded by the market. Although Italian government bonds have been hit hard in the recent selloff, investors believe these declines lack sufficient justification. Alex Everett, who manages Aberdeen Investment Management's euro government bond fund, said: "In recent weeks, spreads in some European markets have widened along with France, and we see opportunities in that. Given the overall strength of an integrated EU and better debt trajectories, Italy, Spain and some smaller markets are expected to outperform." As shown in the chart above, the 10-year government bond yield premium of France over Italy has hit a historic recordunder fiscal and political distress, French government bond yields have already become the highest in the euro area. French government bonds have also lagged those of other European countries, but the change relative to Italy is particularly noteworthy because Italy has long been regarded as the bellwether for euro-area sovereign risk. In July 2012, at the worst of the European debt crisis, Italy's 10-year government bond yield was more than 400 basis points higher than France's. Now, the situation has reversed, with France becoming the center of Europe's bond selloff. The yield spread between France and Germany's government bonds, the region's safe-haven asset, has widened to levels unseen since the European debt crisis, breaking through 150 basis points last week. As the selloff stabilized, the spread briefly narrowed by 5 basis points on Friday to 135 basis points. Irina Kurochkina, a portfolio manager at Aegon Investment Management, said investors took advantage of the recent selloff to buy cheaper bonds from countries such as Italy and Spain. However, she added that investors are still avoiding France overall. She said: "After spreads widened, bonds from some other countries did become more attractive, especially peripheral countries with better budget positions and GDP prospects. French government bond prices have fallen enough to modestly cover short positions, but given the volatility from budget discussions and escalating protests, we are not yet ready to adjust our French government bond position to neutral." France-Italy risk ranking reverses: European debt crisis alarm shifts from "PIIGS" to Paris The "PIIGS" refers to the five European countries Portugal, Italy, Ireland, Greece and Spain, a derogatory term used on Wall Street for five European economies with lower sovereign debt credit ratings. However, this time the country that may trigger a new round of the European debt crisis is not the "PIIGS," long at the bottom of Europe's economy, but France, Europe's second-largest economy. As Europe's second-largest economy, France's government bond market is far larger in its impact on the entire European and global economies than that of the "PIIGS" that ignited the European debt crisis fourteen years ago. More and more investment institutions worry that continued heavy selling of French government bonds could have spillover effects that trigger a new round of a euro depreciation crisis and a European debt crisis shaking global financial markets. Looking back at the previous European debt crisisthen, in 2009, Greece sharply revised up its fiscal deficit, and the post-financial-crisis recession and bank bailout burden further exposed member states' fiscal fragility, with pressure then spreading to Ireland, Portugal, Spain and Italy. Falling government bonds weakened bank assets and financing capacity, while bank bailouts added to government burdens, forming a "sovereign-bank vicious cycle"; fiscal austerity further depressed growth. Market confidence only gradually recovered after European rescue mechanisms were gradually established, especially after then-ECB President Draghi pledged in 2012 to defend the euro "whatever it takes" and the ECB launched the conditional Outright Monetary Transactions (OMT) tool. This time, the European debt crisis alarm is pointing first to a core euro-area economy. Although the bond market got some relief on Fridayin early European trading, France's 10-year yield fell back to about 4.825%, and the France-Germany spread then briefly narrowed to 135 basis pointsthe brief rebound has not yet resolved the issue of budget credibility. What determines whether this storm can be calmed is whether France can convince investors that fiscal commitments can ultimately become executable and implementable monetary or fiscal policy. U.S. Treasuries raise funding prices, France's finances approach the "credit kill line" The sharp rise in U.S. Treasury yields at 10-year and longer maturities is undoubtedly providing external impetus for the repricing of European debt. The U.S. 10-year yield quickly rose from about 4.7% at the end of August to above 5.3%; on October 8, the 10-year and 30-year yields intraday touched about 5.35% and 5.73%, respectively, before falling back to about 5.23% and 5.61% due to strong demand at long-term Treasury auctions. Such a rapid move higher in long-end rates within weeks means global investors are demanding higher returns before they are willing to continue bearing the price volatility and inflation risk of long-term bonds. From a pricing mechanism perspective, long-term yields are determined jointly by expectations for future short-term rates and the term premium. Energy shocks raise inflation risk, massive government debt issuance and AI infrastructure financing increase funding demand, and central bank balance sheet reduction reduces steady buying; therefore, even if expectations for a certain rate hike cool, long-term funding costs may still rise. The U.S. Treasury shock is transmitted to Europe through global portfolio reallocation and term premium linkages, while Europe itself also faces increased debt issuance and pressure from the ECB no longer reinvesting maturing bonds. France additionally bears the impact of a widening fiscal and political risk premium. The most dangerous contradiction in France's government bond market and indeed its entire fiscal system is that interest expenses are eroding room for fiscal consolidation. The latest data released by France's statistics agency show that public debt in the second quarter reached about 3.60 trillion euros, or 119.0% of GDP. The government expects economic growth of only 0.5% in 2026 and a deficit of 5.4% of GDP; even with 54 billion euros of fiscal consolidation in 2027, the deficit target remains 5%. At the same time, interest expenses are expected to rise from 79.2 billion euros to 91.2 billion euros, an increase of about 15%. New issuance and maturing refinancing are becoming increasingly expensive, while fiscal adjustment is constrained by low growth, a divided parliament and election pressure, making it easy to form a feedback loop of "higher interestfiscal improvement blockedrisk premium rising again." The key trigger threshold for a new round of the European debt crisis is whether sovereign pressure will fully penetrate bank financing and real-economy credit. If continued declines in French bonds weaken financial institutions' asset and collateral values, and tighter financing then suppresses lending, investment and tax revenue, France's fiscal pressure could evolve into a broader financial contraction. The ECB has tools to block contagion, but TPI targets financing conditions that deteriorate disorderly without fundamental justification and impair monetary policy transmission, and it must assess fiscal sustainability; therefore, it is not an automatic backstop for any budget imbalance. The alarm for a new round of the European debt crisis has already heated up, but the market has not yet entered a phase of full-scale financing failure. Institutions such as Aberdeen and Aegon have begun buying back Italian and Spanish bonds, while continuing to avoid France, highlighting that global fixed-income investment funds are rearranging European sovereign credit. The high yields on French bonds first reflect a discount for fiscal credibility; the opportunity in Italian and Spanish bonds comes from some investors' revised judgment on correlated selling. The most critical signal next is whether France's budget can be implemented, and whether financing and credit pressure within France continues to spread to euro-area bank credit spreads and corporate financing.