Kristalina Georgieva, who leads the International Monetary Fund, has warned France to tighten its finances as bond yields rise. Her remarks come at a time when France is battling a political crisis driven by student protests and the tough task of persuading a divided parliament to agree to significant spending cuts.
France's political turmoil has put its government bonds, known as OATs, under pressure. Investors are now demanding more from French bonds than from Italian ones. Since the start of the year, yields on France's 10-year bonds have jumped by over 100 basis points. Georgieva described this as a result of ongoing borrowing shocks and a complicated political environment that hampers the finance ministry's ability to enforce fiscal tightening.
Georgieva pointed out the necessity for France to cut its deficit, which was 5.1% of GDP last year, pushing it below the 5% mark. The European Union has advised France to bring its national deficit closer to the 3% benchmark. Despite these hurdles, Georgieva mentioned that Europe is now better prepared than during the eurozone crisis of the early 2000s. She credited the maturity of the European financial system and the strength of the European Central Bank for this improved resilience.
Yet, Georgieva stressed the need for fiscal discipline, saying, "Yet again, my message is — get your house in order." She acknowledged the challenge of implementing the proposed multi-billion-euro fiscal adjustments amid ongoing student protests. These protests, now entering their third week, involve students across France voicing their discontent over long study hours, teacher shortages, and worsening school conditions.
Georgieva noted that since the Covid-19 pandemic, there's been a greater expectation for governments to step in during crises. She emphasized the importance of clear communication to explain why fiscal adjustments are essential for a more stable economic future. "We need more voices to speak about it, not only from government but also from trade unions, from the business community, to bring people together on a mission to improve the prospects for better economic future, " she stated.
She also observed that bond markets are reacting to changing fundamentals like rising inflation, higher interest rates, and substantial government debt. Georgieva urged governments to demonstrate their commitment to containing borrowing to prevent further bond yield increases. "Bond markets respond to fundamentals, and the fundamentals have changed, " she noted, adding that without clear signals from governments, bond yields could keep climbing.
