Any turning point in the selloff of French government bonds would happen only when there is a credible commitment to reduce the deficit over several years to put debt on a sustainable path, Capital Economics' Andrew Kenningham says. "While yields may fall a bit in the coming weeks, we remain pessimistic over the longer term because France's debt-to-GDP ratio looks set to continue rising for the foreseeable future," he says in a note.
The draft budget unveiled Thursday, which could still be watered down, would reduce the deficit to 5.0% next year, not enough to stabilize the debt ratio. It looks increasingly likely a bigger fiscal crisis will be needed to prompt France's politicians to agree on a sustained program of fiscal consolidation, Kenningham says.
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