Hollande Economic Woes Masked by Cyprus Fig Leaf: Euro Credit
French President Francois Hollande is basking in borrowing costs at near record lows, helped most recently by investors seeking shelter from problems in Cyprus.
The yield on France’s benchmark 10-year bond fell 4 basis points to 2.026 percent during the 10 days as European authorities roiled markets by imposing a tax on depositors in Cypriot banks. The French rate is just short of the all-time low of 1.92 percent reached in December.
Hollande will be able to boast about that when he appears on national television tonight to defend his management of Europe’s second-largest economy and attempt to bolster his sagging popularity. The pitch is a tough sell to citizens and investors alike, who know the bond rally conceals a two-year stagnation in the economy with joblessness near a record high.
“I don’t see any value in French bonds” at current levels, said Robin Marshall, director of fixed-income at Smith & Williamson Investment Management in London. “The reforms in France have stalled and the economy is contracting. The problem in the peripheral space helped to divert attention of the market from these problems.”
French bonds gained 0.4 percent since the Cyprus woes took center stage about two weeks ago, beating Belgian bonds’ 0.26 percent rise and lagging behind AAA rated countries as Germany returned 1.0 percent, the Netherlands 0.9 percent and Austria 0.5 percent. France was stripped of its top credit rating last year by Standard & Poor’s and Moody’s Investors Service.
With an overstretched banking system, Cyprus has struggled to lock in a bailout from the European Union. An original plan that would have imposed a levy on all bank deposits to raise 5.8 billion euros ($7.4 billion) prompted street protests and was rejected by the Cypriot parliament.
Under the agreement reached in the early hours of March 25 with the EU and International Monetary Fund, account holders with up to 100,000 euros in the nation’s banks will be spared. Uninsured deposits over the threshold now face as much as 40 percent losses at Bank of Cyprus Pcl, the country’s largest bank. Cyprus Popular Bank Pcl, the second biggest, will be wound down, hitting uninsured depositors and bondholders.
European governments vowed yesterday that the swoop on bank accounts to finance Cyprus’s aid package won’t set a precedent for future rescues. Still, Cyprus is “a net negative story for peripheral countries,” said Luca Jellinek, head of European fixed-income strategy at Credit Agricole CIB in London.
Cyprus’s banks opened today for the first time in almost two weeks, with new rules curbing access to cash preventing an initial panic to withdraw deposits. They opened at midday local time, with lines of about 15 to 20 people waiting to enter branches in the Cypriot capital.
“That will support demand for relative safety of bonds from core countries, and I see France as part of that, even at the time when people are focusing on politics and the popularity of Mr. Hollande,” he said.
The spread between French and German 10-year debt is widening. It was 75 basis points as if 11:50 a.m. in London, up from 61 basis points 10 days ago and 58 in mid-December.
France’s economy remains in the doldrums. Growth shrank 0.3 percent in the fourth quarter, the national statistics office Insee said yesterday. The economy has been essentially stalled for the past two years and Insee predicted last week that stagnation will extend through the first half of 2013.
French jobless claims rose for a 22nd straight month in February as companies pared payrolls. The increase, propelled by firings at companies such as Goodyear Tire & Rubber Co. and Alcatel-Lucent (ALU), brings the number of claimants to just shy of the record 3.196 million in January 1997. The 10.6 percent unemployment rate is the highest in more than 13 years.
For France’s international partners, Hollande needs to step up efforts to improve its competitiveness by holding down wages, cutting the deficit and increasing labor flexibility. The Organization for Economic Cooperation and Development said last week that Hollande has a “unique” opportunity to overhaul his nation’s economy.
“France is seen as a country that has a lot of work to do to restore its competitiveness, to rebalance its public finances,” European Central Bank executive board member Benoit Coeure said this week on Europe 1 radio. “It has begun, it’s going in the right direction, but it won’t happen on its own. There’s a lot left to do.”
The economic gloom has rendered Hollande the most-unpopular French president in more than 30 years, according to a TNS- Sofres poll in February. His approval rating fell 8 percentage points in the past month and is at a record low for a president 10 months into his mandate, a BVA poll showed last week.
In his TV appearance tonight, Hollande may seek to focus on the dire state of the economy he inherited and his efforts over the 10 months since he’s been in power, including managing to keep French borrowing costs for 10 years at close to 2 percent.
“Hollande needs to use his television appearance to inspire confidence,” said Emmanuel Riviere, a pollster at TNS Sofres in Paris. “He needs to show the French they have reason to be confident in themselves and they have reason to be confident in his leadership.”
He may eventually have to face up to the fact that troubles elsewhere in the euro region will come back to bite France, said Smith & Williamson’s Marshall.
“We don’t know how long France will continue to benefit from this type of safe-haven flows,” he said. “At the end of the day, the problem in Cyprus or other peripheral countries are not going to make it easier for countries that are not growing. The risk of capital flight and deposit run are greater now than it was before.”
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