Rise in French yields is manageable now, but consolidation pressure might grow, IMF says

By Jan Strupczewski

BANGKOK, Oct 16 (Reuters) - The rise in French borrowing costs is manageable in the short term, but if it persists it will increase pressure on Paris to come up with a credible medium-term consolidation plan beyond the 2027 budget, the head of the International Monetary Fund's European department said.

The spread of French 10-year bonds over equivalent German paper is hovering close to 140 basis points. The French bond yield has risen towards 4.9%, trading at its highest level in more than 20 years.

Markets worry about how willing the fragmented French political scene is to pass a deficit-cutting 2027 budget and conduct sound fiscal policy ahead of elections in April and May.     

Speaking to Reuters on the sidelines of the IMF's annual meetings in Bangkok, the IMF's Mateusz Szczurek said that, for now, the bond market was still behaving in an orderly way.

"It (the market) is liquid, the maturity structure is quite long, the investor base is diversified, and bank liquidity is high, which also helps. So the short-term debt risks are certainly manageable," Szczurek said.

"But if yields are going to stay higher for longer, it will put greater pressure on public finances and cost control. It certainly reminds us of the urgency of correcting fiscal imbalances, starting with the 2027 budget, which, in our view, needs timely approval in line with European Union fiscal rules," he said.

France expects a budget deficit of 5.4% of GDP this year, against its initial ambition of bringing it down to 5.0% -- which has now become the target for 2027. France will have to bring the deficit below 3% of GDP by 2029 to meet European Union laws.

"That is certainly necessary. Market movements remind us, and French policymakers, of that. Market signals have the power to change policies. We have seen this many times in the past. In a sense, a reality check from the bond markets can change and accelerate fiscal adjustment," Szczurek said.

The IMF expects French real GDP to grow only 0.4% this year and 0.7% in 2027, slashing forecasts made in April for 0.9% growth in both years. The new estimates are well below the forecast euro zone growth of 1.1% and 1.2% respectively.

(Reporting by Jan Strupczewski; Editing by John Mair)