UBS Chief Executive Officer Sergio Ermotti stated that hard measures are required to address France's spiraling debt crisis, warning that small, incremental changes will prove insufficient. Speaking to CNBC on Tuesday, Ermotti compared ongoing turmoil in Europe's bond market to the eurozone's 2011 sovereign debt crisis, noting that the size of France's economy could make its challenges more difficult to manage this time.
Ermotti referenced past crises in Spain, Italy, Greece, and Portugal over the last 10 to 15 years, observing that those nations are currently among Europe's best-performing economies. He suggested that other European regions facing a debt squeeze may require similar measures to restore a credible path to growth. When asked if that implied austerity, Ermotti replied that hard measures are necessary to resolve the large debt pile.
Yields on French government bonds, known as OATs, have increased in recent weeks amid a broader European sovereign debt sell-off driven by concerns over the nation's fiscal position. France's benchmark 10-year note yield stood at 4.7689% on Tuesday afternoon after easing 9 basis points, placing French borrowing costs above those of Greece and Italy.
Marine Le Pen, a far-right presidential candidate, pledged significant spending cuts on Tuesday to control debt, warning that France ultimately risks defaulting. Mitch Reznick, head of cross-border credit at Federated Hermes, noted in a Tuesday commentary that France has become the central focus of European bond difficulties, with its debt increasingly priced akin to the eurozone periphery rather than core Europe.
Reznick stated that investors are shifting out of French government bonds and into German Bunds, widening the spread between the two. He added that the European Central Bank is unlikely to intervene immediately, though its language could shift if spreads continue to widen. The OAT-Bund spread has exceeded 140 basis points amid concerns over high debt, large budget deficits, increased bond supply, and political uncertainty ahead of the presidential election.
