France-Germany Yield Spread to Widen to 100 Bps: Thozet

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Transcript

00:00Is there a contagion effect from the French political chaos when it comes to this bond market?

00:07Well, yes, yes, there is. I mean, you know, higher borrowing costs means what means lesser

00:13investments down the road and lesser capacity to grow further out. I mean, you know, if nothing is

00:19done by 2027, the first line of spending for the French government will not be education. It will

00:25be debt servicing. So, you know, that's clearly an issue. So it shows. It shows in the real

00:32economy as well. I mean, when you're looking at small and mid-sized companies, their intention

00:37to spend, so to provide some form of investments, to increase basically capex over the coming

00:43year has fallen as low as 38 percent. So that's very low as well. And I think likewise for

00:48households. I mean, savings rates in France are as high as 19 percent. That's huge. So

00:53what is this what is this telling us or what this situation is telling us is that internal

00:58demand is very, very low. And so we're just kind of, you know, making the situation worse.

01:03Basically, economic growth this year, economic growth next year is expected to be below potential,

01:09while at the same time funding costs are expected to grow from an average of, let's say,

01:142 percent to as high as 3 percent. Kevin, when do I start pricing in a RN government and how

01:22do you think the market would react to that? Well, I mean, again, our base scenario is that

01:29we do get to, so this relation of the National Assembly, that we get legislative snap elections.

01:36And should this happen, then comes the usual race or French usual race, let's say, of political

01:45alliances. Because if we get kind of, you know, the similar parties campaigning on similar campaigns,

01:51then we just get to the same results. I mean, you know, at the latest legislative elections,

01:57the national rally was because of the leading party in France, got 33 percent of votes, and they

02:04have 140 members of parliament. You need twice this to have a majority. So, you know, if we were

02:11holding snap elections tomorrow, potentially the stalemate would remain. So this is the uncertain bit,

02:18and we know that in the games of political alliances and in opinion polls, this is something

02:22which can scare markets off. If tomorrow, let's say, the left side of the political chess

02:28is awarded a significant or high intentions in terms of voting, then this is likely to scare

02:35markets off and could send those French spreads, the difference between the OATs and the Boots,

02:42up to 100 basis points, and that's our base case as well.