French borrowing costs fall to record low despite crisis

AFPAugust 25, 2014
French Economy Minister Arnaud Montebourg holds a rose as he listens to a speech, on August 24, 2014 in Frangy-en-Bresse, eastern France, during the 42nd Fete de la Rose (Rose Celebration), a traditionally socialist event
French Economy Minister Arnaud Montebourg holds a rose as he listens to a speech, on August 24, 2014 in Frangy-en-Bresse, eastern France, during the 42nd Fete de la Rose (Rose Celebration), a traditionally socialist event (AFP Photo/Jeff Pachoud)

Paris (AFP) - Borrowing costs for France fell to a record low level early on Monday despite the resignation of the government, which plunged the country into a political crisis on top of depressed economic activity.

But analysts said the main factor was not increased risk from the political situation in France, which could be expected to push interest rates up, but a promise by the European Central Bank to ensure that deflation does not take hold in the eurozone.

That implied a possible injection of central bank funds.

The interest or yield indicated by 10-year bonds already issued and traded on the secondary market fell to 1.325 percent, although it edged back up later to 1.329 percent.

Socialist President Francois Hollande ordered his Prime Minister Manuel Valls to form a new government after Economy Minister Arnaud Montebourg attacked government policy at the weekend for being orientated towards reducing the public budget deficit.

However the main factor affecting financial markets in Europe on Monday was a promise by the head of the European Central Bank, Mario Draghi, to do everything necessary to ward of any threat of deflation.

Bond yields on the secondary market, which indicate the interest rate a government will pay the next time it borrows money by issuing debt, rise and fall in opposite direction to the value of the bond.

In this case, investors have moved extra funds into French bonds, pushing up their value, and automatically lowering the fixed interest they carry as a percentage of the new higher price, in anticipation of a possible easing of monetary conditions by the ECB.