French debt should not be a problem, says Swiss banking group

The fixed income market reacted after French President Emmanuel Macron’s early election announcement. However, Julius Baer says that debt sustainability should not be a problem, according to a note sent to clients and the market this Tuesday (June 18, 2024).

Considering sovereign and bank debt, the real risks would remain contained and below the fears perceived by the markets.

“The French government pays low rates on its outstanding debt. Consequently, we see no reason to question the quality of French banks’ balance sheets”, pointed out the Swiss group, mentioning obstacles, however, for French sovereign and banking debt, such as the downgrade of the rating sovereign credit rating at one level by the S&P agency.

Markus Allenspach, fixed income researcher at Julius Baerdoes not rule out further reductions in rating and negative news involving excessive deficit procedures, due to the debt level of 112%, twice as high as that estimated in the European Union’s Growth Stability Pact.

“That said, we note that the average interest rate that the French government pays on its debt is 1.9%, according to figures from the European Commission. A simple rule of thumb for debt sustainability requires that the average interest rate remains below nominal GDP growth, which is expected to be 3.5% this year. Debt sustainability is not a problem if we consider this aspect”, says Allenspach, who assesses pressure on French bank debt as temporary.

With information from Investing Brasil.