In July, Japanese investors sold a record $9.2 billion of French debt. The dramatic shift reflects growing concerns among international investors about France's financial stability, as the government deficit reaches large levels and the country's sovereign rating has been downgraded.
A massive sale that raises questions
Japanese investors sold 1,320 billion yen (about $9.2 billion) of French debt securities during the month of July 2024. This record figure had not been reached for more than four years. Indeed, this massive sale is a radical change in the relationship that Japanese investors have had with French bonds until now.
The sale of these bonds, which comes in a context of political tensions in France, does not entirely surprise experts. Since the downgrade of France's sovereign rating by the S&P Global agency, confidence in the management of French public finances has been shaken. The public deficit, which will reach 5.5% of GDP in 2023, has accentuated these doubts, which has led investors to redirect their funds towards safer assets. This is therefore not only a disavowal of French debt, but also a global reconsideration of risks, in light of European political uncertainties.
The consequences?
The sell-off by Japanese investors is not just a portfolio adjustment. It could be a lasting loss of confidence in France’s ability to manage its debt. With more than half of public debt held by foreign investors, a divestment of this magnitude could send shockwaves through financial markets, especially if other foreign investors follow Japan’s lead. As Banque de France Governor François VILLEROY DE GALHAU has stressed, efforts are needed to reduce spending and restore market confidence.
The Japanese sell-off could also force the French government to adopt stricter fiscal measures to stabilize its finances. In the short term, the country's solvency does not appear to be threatened, but if these large sales continue, the country could face higher borrowing costs. In the event of deeper economic difficulties, tax increases and austerity policies could be inevitable, which would certainly revive the already palpable social tensions in the country.
While the sale of $9.2 billion of French debt by Japanese investors does not appear to immediately endanger France's financial stability, it should be seen as a warning signal. The confidence of international markets in the management of French public finances is fragile, and strong measures will be necessary to reassure investors and avoid possible contagion to other foreign holders.
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