Credit risk indicators on bonds issued by major French banks have risen markedly as market concerns over France's fiscal position and political situation spread into credit markets, according to data cited by Zhitong Finance.

The credit default swap (CDS) spreads of Societe Generale, BNP Paribas, and Credit Agricole are all now significantly wider than those of major banks in the UK, Germany, Switzerland, and Spain, with default insurance costs on some Societe Generale bonds having surpassed those on comparable Deutsche Bank debt.

This shift indicates that the pressure recently building in the French sovereign bond market is gradually transmitting into the bank credit market.

The yield on French 10-year government bonds has climbed sharply in recent months, and its spread over German bunds of the same maturity recently rose to the highest level since the eurozone debt crisis.

French bank credit risk gauges climb as Societe Generale default insurance costs exceed Deutsche Bank's

According to the data, on Monday the annual cost of buying default protection on 10 million euros (about 11.2 million US dollars) of Societe Generale five-year bail-in senior debt had risen to 103,000 euros.

By contrast, buying the same amount of default protection on comparable Deutsche Bank debt costs about 16,500 euros less per year.

On that basis, the related cost comes to roughly 86,500 euros.

That gap has widened rapidly in recent weeks.

As recently as the end of August, the default insurance costs on comparable Societe Generale and Deutsche Bank debt were still at the same level.

Credit default swaps are typically used by investors to hedge against the risk of a debt issuer defaulting, and a widening spread generally means the market is demanding greater compensation for credit risk.

The rise in French bank CDS spreads therefore reflects heightened investor concern about their credit risk.

It is not just Societe Generale; the CDS spreads of France's two other major banks, BNP Paribas and Credit Agricole, are also now clearly wider than those of large banks in the UK, Germany, Switzerland, and Spain.

In fact, even before September began, the CDS spreads of major French banks were already wider than those of some European peers.

French political risk has been simmering for several years, and uncertainty has intensified further in recent weeks, making that gap even more pronounced.

Fiscal worries and heightened political uncertainty weigh on French sovereign debt

Behind the rise in French bank credit risk is mounting concern over the country's fiscal outlook and political situation.

The budget proposal France published last week was described by the country's fiscal watchdog as "optimistic," further drawing investor attention to the state of public finances.

At the same time, with next year's presidential election approaching, political uncertainty has also become a market focus.

The potential second-round run-off scenario reflected in recent polls has further increased investors' uncertainty about the future direction of policy.

These concerns have already shown up first in the French government bond market.

The yield on French 10-year government bonds has risen notably in recent months, and its spread over German 10-year bonds recently touched the highest level since the eurozone debt crisis.

The French-German bond spread is generally seen as an important gauge of how worried the market is about French sovereign risk.

A wider spread means investors are demanding greater risk compensation to hold French government bonds.

ING strategists Jeroen van den Broek and Timothy Rahill said in a report on Monday that rising interest rates, rekindled fiscal concerns, and intensifying uncertainty have finally broken the recent relative calm in euro credit markets.

The two strategists noted that the weak performance of French-related assets has been the most obvious, but pressure has also begun to spread to European periphery markets.

Sovereign debt pressure transmits to credit markets, with French banks bearing the brunt

Banks are vulnerable to rising sovereign risk partly because they may themselves hold large amounts of government bonds, and partly because their lending businesses can also be indirectly affected by changes in fiscal policy, economic growth, and financing conditions.

When a country's government bond yields rise sharply, the bond assets held by banks may come under price pressure.

At the same time, higher market interest rates can push up financing costs for companies and households, in turn affecting credit demand and borrowers' ability to repay debt.

In addition, if fiscal and political uncertainty continues to weigh on economic activity, bank asset quality and future earnings prospects may also be indirectly affected.

As a result, sovereign debt risk and bank credit risk are often closely linked.

The further widening of major French bank CDS spreads in recent days shows that concerns previously concentrated in the sovereign bond market are now transmitting into the pricing of credit risk for financial institutions.

It is worth noting that this shift also echoes the pricing divergence that has recently appeared across different European asset classes.

Previously, the yield premium of French government bonds over German bunds had already widened significantly, while European equities and the corporate credit market overall performed relatively steadily.

Now, with major French bank CDS spreads widening further, it means the pressure released by the sovereign bond market is beginning to leave a more visible mark on the credit market.