UBS CEO Warns France's Worsening Debt Crisis Demands "Tough Measures"

Deep News
10 hours ago

Key points: UBS Chief Executive Sergio Ermotti said France needs to implement "tough measures" to restore fiscal credibility.

Market concerns over France's debt burden have intensified, with French government bond yields rising sharply in recent weeks.

UBS Chief Executive Sergio Ermotti said in an interview that addressing France's worsening debt crisis requires "tough measures," and "small gradual adjustments" alone will not be enough.

On Tuesday, Ermotti appeared on the program "Street Talk," where he compared the current turbulence in the European bond market to the 2011 eurozone sovereign debt crisis, and warned that France's large economic size means this crisis will be harder to handle. "Over the past 10-15 years, Spain, Italy, Greece, and Portugal all went through similar situations," Ermotti said. "These countries that were once mired in severe crises are now among Europe's best-performing economies."

Other European regions facing similar debt pressures may also need to adopt "similar approaches" in order to "return to a credible growth trajectory."

When asked whether this means implementing austerity policies, Ermotti said: "Tough measures must be introduced... relying only on small gradual changes cannot resolve the problem of a massive debt stock."

Amid a broad sell-off in European sovereign bonds, investor concerns about France's fiscal situation have continued to intensify, with French government bond (OAT) yields surging sharply in recent weeks.

On Tuesday afternoon, the yield on France's benchmark 10-year government bond fell 9 basis points to 4.7689%. France's borrowing costs are now higher than those of Greece and Italy.

Far-right presidential candidate Marine Le Pen pledged on Tuesday to implement large-scale spending cuts to bring the debt under control, and warned that France ultimately faces a risk of debt default.

Mitch Reznick, head of cross-border credit at AllianceBernstein, said in a research note on Tuesday that France has quickly become the central focus of problems in the European bond market. The market's pricing of French debt is "increasingly resembling that of a peripheral country rather than a European core country."

He added that investors are selling French government bonds and shifting into safer German bunds, further widening the yield spread between the two countries.

Reznick believes that the possibility of European Central Bank intervention remains low at this stage; however, if the spread between the two countries continues to widen sharply, "the central bank's messaging may shift."

Reznick noted: "The France-Germany government bond spread has already broken through 140 basis points. Market focus is centered on France's persistently high debt, large fiscal deficit, increased government bond supply, and political uncertainty ahead of the election."

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