The cost of credit default swaps on French banks has risen sharply, surpassing that of their European competitors

The cost of insuring French bank bonds against default has risen sharply and exceeded that of other European banks: concerns about the fiscal and political situation in France have spilled over into the credit markets, according to Bloomberg. The credit default swap spreads for France’s BNP Paribas and Credit Agricole are significantly higher than those of major banks in the United Kingdom, Germany, Switzerland, and Spain, the agency’s data showed.

BNP Paribas shares, however, rose 0.76% during trading in Paris on October 5; over the past month, they have lost about 11%; Credit Agricole shares, in turn, rose 0.27% on Monday, though they are down nearly 10% over the past month.

According to Bloomberg, the annual cost of insuring €10 million ($11.2 million) of Société Générale’s senior debt subject to a bail-in, with a five-year term, reached €103,000 on October 5. This is approximately €16,500 more than the cost of insuring a similar amount of Deutsche Bank debt. As recently as late August, the cost of protection for both banks was the same. A bail-in is a mechanism for rescuing a troubled bank at the expense of its investors and creditors, rather than the government: during a restructuring, such debt may be written off or converted into equity.

Bloomberg notes that the credit default swap (CDS) spreads for BNP Paribas and Credit Agricole also significantly exceed those of major banks in the United Kingdom, Germany, Switzerland, and Spain.

“Rising interest rates, renewed fiscal concerns, and growing uncertainty have finally disrupted the recent calm in the European credit market,” ING Bank analysts Jeroen van den Broek and Timothy Rahill wrote in a note to clients on Monday. According to their assessment, French assets were hit the hardest, but the pressure has spread to other eurozone countries as well.

Problems with public finances and political instability in France are affecting banks both directly—through the government bonds they hold—and indirectly—through the impact of economic policy on their loan portfolios, the agency continues. Credit default swap (CDS) spreads for major French banks were already higher than those of their European competitors even before early September: political risk had been mounting for a couple of years and has escalated sharply in recent weeks, Bloomberg notes.

The spread in the cost of debt insurance for French and other European banks emerged against a backdrop of fiscal and political instability in France. The country’s draft budget, presented last week and calling for a reduction in the deficit from 5.4% of GDP this year to 5% next year, was described as “optimistic” by the national budget oversight agency. Investors are also on edge ahead of next year’s presidential election in France: according to the latest polls, far-right candidate Marine Le Pen and far-left candidate Jean-Luc Mélenchon could advance to the second round.

Against this backdrop, yields on 10-year French government bonds have risen sharply in recent months, and the premium that investors demand on these bonds compared with similar German bonds (Bunds) recently reached its highest level since the eurozone debt crisis, Bloomberg notes.

This article was AI-translated and verified by a human editor