French Finance Minister Michael Sapin is alarmed. During a lunch with journalists in Paris this week, he warned off any investors who may be betting on victory by radical right-wing politician Marine Le Pen in the May presidential election, and thereafter the breakup of the euro zone: Le Pen would "never be elected in France," Mr. Sapin declared.
He said that her party, the Front National, is not a right-wing populist group, it is a group that "stands outside the democratic consensus and the values that France represents."
Anyone who bets on Ms. Le Pen and against France will "lose a lot of money," he said. Mr. Sapin even compared this with speculation over a French departure from the European monetary system in 1992 and 1993. "At the time, many people speculated that France would withdraw – and they lost billions," Mr. Sapin recalled.
Whether or not they bet against France, it is clear that investors are worried.
French development bank, Agence Française de Développement, was forced to cancel a bond for $1 billion because of a lack of interest, under current terms.
Ms. Le Pen, who has been attacking the euro for years, wants France to reintroduce the franc. And now there are growing fears in the markets, as the French presidential elections get closer by the day and Ms. Le Pen expands her lead. As conservative candidate François Fillon is increasingly bogged down by a scandal surrounding alleged fictitious jobs for his wife, some investors are starting to worry that Ms. Le Pen stands a better chance of winning the second round of elections in May.
In the French presidential elections, the first round of voting on April 23 will select the two top candidates for the job. The second round of voting, held May 7, will ask French voters to choose between those two top candidates. It is generally expected that while Ms. Le Pen may make it through to May’s vote, she would not win.
All of this uncertainty is impacting on investment, with investors' fears reflected in the risk premiums for French government bonds. The yield premium for 10-year bonds has now risen to more than 0.7 percentage points higher than German government bonds, reaching the highest level since the fall of 2012, in the midst of the euro crisis. In absolute terms, France is still able to borrow money at a relatively low cost of a little more than 1 percent yield on 10-year bonds. However, "there has been an incredible expansion in yield spreads," said David Schnautz, an interest rate strategist with Commerzbank, based in London.
French development bank Agence Française de Développement, which funds development projects in about 70 countries, felt the brunt of these concerns this week, when it cancelled the placement of a bond for $1 billion because of a lack of interest under the terms offered. This could be a harbinger for all French borrowers who want to get into the market before the elections, Suki Mann, a credit strategist with Credit Market Daily, an analysis website, wrote.
But investors are not just skeptical about France. In Italy, where new elections will likely be held by this summer, risk premiums have increased by almost 2 percent. The Five Star Movement under Beppe Grillo, which also stands a good chance of doing well in the election, is a declared opponent of the euro.
Another foe of the monetary union, populist politician Geert Wilders, is running in the Netherlands, where elections will be held on March 15. Although yields on Dutch bonds are still very low, at less than 0.7 percent, the risk premium in the Netherlands versus German bonds has more than tripled since January, to 0.3 percent.
Fears of crisis have returned to the euro zone. "This phenomenon is not limited to a specific country," said Andrew Bosomworth, head of portfolio management in Germany at global investment firm PIMCO, a subsidiary of German insurer Allianz. "If France left the euro, it would be the beginning of the end of the euro zone," Mr. Bosomworth said. He still believes that this is unlikely, however.
But if that did happen, it would lead to chaos in the markets, because there are no provisions in the European treaties for a withdrawal of one country. "Investors are already wondering whether France could repay its outstanding bonds in francs instead of euros," said Mr. Bosomworth. Because of new debt restructuring clauses, any euro country contemplating such a step with bonds issued since 2013 would require the approval of the majority of investors. But that, as Mr. Bosomworth explained, is hardly possible.
As yet the markets are not reflecting any kind of fear of a complete collapse of the euro zone. Investors were much more worried about the cohesion of the monetary union in 2012. That was before European Central Bank President Mario Draghi gave his famous London speech, in which he promised to do everything necessary to save the euro. Greece had completed its debt haircut at the time and Ireland, Portugal and Cyprus had taken shelter under the euro bailout umbrella, while Spain needed European funds to restructure its banks. The risk premiums for French bonds versus German equivalents were at about 1.5 percent at the time, but they were many times higher in other countries.
Since then, the ECB has launched a massive bond-buying program and purchased bonds – mostly government securities – worth a total of more than €1.5 trillion ($1.6 trillion). Yields on government bonds have declined sharply as a result.
"The impact of ECB policy is slowly declining," Mr. Bosomworth warned. Since the central bank announced in December that it would reduce its monthly bond-buying program by €20 billion to €60 billion starting April, investors have become more unsettled.
Still, with the exception of Greece, with risk premiums of about 7.5 percent on 10-year bonds, all the euro zone countries are now able to refinance their debts without the help of the rescue fund. Greece is seen as a special case.
Risk premiums are a reflection of Greece’s problems and a slew of current headlines are suggesting that the idea of the Grexit – a Greek exit from the monetary union but not the political one – is on the cards again.
On Wednesday, yields on two-year government bonds neared 10 percent, the highest they’ve been since June 2016. This is due to ongoing uncertainty about Greece’s current bailout program as the International Monetary Fund and E.U. politicians debate the conditions and Greek leader Alex Tsipras delays the asked-for reforms.
While polls suggest that almost three-quarters of Greek voters want to remain with the euro, some Greek politicians are calling loudly for a return to the drachma.
In an interview with Greek television the U.S. president's pick for ambassador to the E.U., Ted Malloch, didn’t ease anyone’s concerns. “I think this time … the odds are higher that Greece itself will break out of the euro,” Mr. Malloch, who has been criticized for attitudes antipathetic to the E.U., told a late night chat show. Mr. Malloch also suggested that if Greece returned to the drachma, it could be pegged to the dollar.
Those in Greece who don’t want the drachma back are pinning their hopes on a February 20 meeting of European finance ministers, during which they hope the way to further Greek credit will be cleared.
This time the odds are higher that Greece itself will break out of the euro. Ted Malloch, Candidate for U.S. ambassador to E.U.
There’s also been another unsettling event lately, that could ostensibly indicate a fresh crisis: This involves the so-called Target balances, which is short for the Trans-European Automated Real-time Gross Settlement Express Transfer System. In January, the German Bundesbank's Target balances reached a record level of almost €800 billion while Italy and Spain had liabilities of more than €300 billion each.
Central banks in the euro system use the Target system to calculate cross-border payments. At the height of the euro crisis, from 2010 to 2012, investors withdrew massive amounts of money from crisis-ridden countries and moved it to Germany, which created enormous imbalances.
However, this time the Bundesbank, the ECB and many economists are not attributing the recent rise in Target balances to capital flight, but to the bond purchases by euro central banks. The central banks often acquire the bonds from banks or investors that are not from the euro zone and usually have their Target accounts in Germany or other core countries.
For instance, if the Italian central bank buys Italian government bonds from a U.S. bank that has an account with the Bundesbank, the German Target balance rises. This explains why the Bundesbank's claims have begun increasing again since the bond purchases began in 2015.
Commerzbank economist Michael Schubert believes that the increase in Target balances is cause for concern. Part of the reason for the increase, he explained, is that the sellers of the bonds are not reinvesting their money in peripheral countries. Critics also fear that the Bundesbank's Target claims would become worthless in the event of a breakup of the euro or the withdrawal of one country from the euro zone. In other words, Germany – along with everybody else - would be directly and seriously affected by a collapse of the euro.
Andrea Cünnen works at Handelsblatt’s finance desk, reporting on bond markets and Jan Mallien covers monetary policy; both work from Frankfurt. Thomas Hanke is Handelsblatt’s Paris correspondent and Gerd Höhler is based in Athens, Greece. To contact the authors: [email protected], [email protected], [email protected], [email protected]