Euro zone ministers tell France to pass 2027 budget to calm markets

By Jan Strupczewski

BRUSSELS, Oct 8 (Reuters) - Euro zone finance ministers and the European Central Bank told France on Thursday to pass a 2027 budget to calm bond markets, as French borrowing costs hover at 25-year highs.

Euro zone finance ministers and the ECB meet in Luxembourg on Thursday afternoon for monthly talks and the surge in French borrowing costs was discussed.

France is at the centre of a bond market storm on worries over the country’s large budget deficit and looming 2027 presidential election.

Its 10-year bond yield has jumped nearly 80 basis points (bps) since the start of September and hit its highest level since July 2002, just short of 5%. That is driving up borrowing costs and making the fiscal maths harder.

"It is essential that all member states, and in particular those with high deficits or debts, implement prudent fiscal policies," EU Economic Commissioner Dombrovskis, who took part in the ministerial talks, told a news conference afterwards.

"Putting in place a sound budget for the next year will be important to ensure this predictability and credibility and to reassure markets. I'm in contact with,(French Finance) Minister Lescure on this," he said.

France said in September that its budget deficit will overshoot the government's 5% target this year. 

The government has announced tightening measures to bring some calm, but investors are sceptical they can be carried out because of the fragmentation of the French parliament and presidential and parliamentary elections in April and May 2027. 

France also plans to sell a record €340 billion ($381 billion) of bonds in 2027 to fund the government and refinance COVID-era debt.

"We have confidence in France's commitment vis-a-vis public finances," the chairman of euro zone finance ministers Kyriakos Pierrakakis told the news conference.

Officials said no euro zone institution was ready to jump in to help France lower its borrowing costs. Officials, speaking on condition of anonymity, made clear it was up to French politicians to sort out the uncertainty they have created.

The European Central Bank can buy bonds of a euro zone country on the secondary market, if their prices move in an unjustified way, to protect the transmission of monetary policy.

ECB President Christine Lagarde told euro zone ministers the central bank had instruments to counter unwarranted, disorderly market dynamics that threaten the smooth transmission of monetary policy, but they were subject to clear eligibility criteria, according to officials familiar with the discussions.

Published on the ECB website, the criteria include compliance with the EU's fiscal rules and not being in an EU excessive deficit procedure -- disciplinary action for countries with budget deficits higher than the EU ceiling of 3% of GDP.

France is in such a disciplinary process with a budget gap above 5% of GDP. Its fiscal policies do not match the fiscal consolidation path agreed with the EU, so it would not be eligible for ECB help.

Since the creation of the euro currency in 1999, France -- the European Union's second biggest economy and a key political player -- has only had a budget deficit below the EU's ceiling of 3% six times. Some officials said that debt markets were probably the only factor that could force it to consolidate.

(Reporting by Jan Strupczewski; editing by Philip Blenkinsop and Nick Zieminski)