TheChek News Flow

Sell-off in French government debt has pushed borrowing costs for some maturities above those of Portugal

France’s finance minister has warned that the country could face a debt crisis akin to the UK’s gilt market turmoil under former prime minister Liz Truss if the far-right Rassemblement National wins snap elections this month and next.

In a sign of market nerves, French government bonds have sold off sharply since President Emmanuel Macron’s shock announcement on Sunday that he would dissolve parliament and call fresh elections after his party was routed by the far right in European elections.

The sell-off has pushed the gap between French and German borrowing costs to its highest level since October. The cost of some maturities of French debt has also risen above those of Portugal, which was bailed out during the Eurozone crisis and had a junk credit rating for much of the past decade.

“If the RN implements its programme, a debt crisis is possible. A Liz Truss-style scenario is possible,” finance minister Bruno Le Maire told local party officials on Tuesday night.

A crisis erupted in the UK bond market in 2022 when Truss put forward a Budget that would have implemented tens of billions of pounds worth of unfunded tax cuts. Truss was forced to resign after only 44 days in office, but not before the crisis had knocked hundreds of billions of pounds off the value of UK pension schemes.

Le Maire warned that France “simply [does] not have the means to finance [RN leader] Marine Le Pen’s additional tens of billions of euros” in costs associated with the party’s agenda to cut sales taxes and reduce the retirement age.

“A Liz Truss scenario is impossible because the pensions of the French are not capitalised, and we do not intend to affect the savings of the French,” said the RN.

“These accusations betray a great economic ignorance and demonstrate the irresponsibility of the power in place.”

The yield on benchmark 10-year French bonds rose as much as 0.22 percentage points on Monday and Tuesday to more than 3.33 per cent at one stage, pushing the premium on France’s borrowing costs over Germany’s to 0.62 percentage points. 

French bonds later partially reversed losses to trade at a yield of 3.15 per cent on Wednesday, although they lagged behind a global rally. Investors remain concerned that, should the RN take or share power, its plans for tens of billions of euros of extra public spending could prevent any improvements in the country’s yawning budget deficit.

François Villeroy de Galhau, governor of the Bank of France, on Wednesday warned that the country needed to clarify its spending trajectory as soon as possible.

“It will be important that, whatever the outcome of the vote, France can quickly clarify its economic strategy and in particular its budgetary strategy,” he told Radio Classique on Wednesday morning. “Electoral periods are always accompanied by uncertainty . . . but investors do not like uncertainty.”

The heavy selling of French bonds this week follows rating agency S&P’s decision to lower its rating on French debt at the end of May to double A minus, pouring cold water on the French government’s efforts to improve its public finances. 

“When you look at French debt metrics the deficit is an issue and I think that, combined with political uncertainty, makes it no surprise that spreads have widened,” said Andrew Balls, chief investment officer for global fixed income at bond giant Pimco. Markets were “pricing the risk appropriately”.

France’s budget deficit was far above target at 5.5 per cent last year, which puts France on the EU’s excessive deficit procedure list. According to new EU rules that kick in next year, France will need to reduce its structural deficit by 0.5 per cent per year until the overall deficit comes below 3 per cent. 

The government has also pledged to bring the deficit below 3 per cent by 2027. Cedric Gemehl, analyst at Gavekal Research, said those plans “did not look credible to begin with” and “even less so now”, adding that “further downgrades look probable”. 

Jason Davis, global rates portfolio manager at JPMorgan Asset Management, said he has held a lower-than-benchmark weighting in French government bonds for some time. “The snap election increases uncertainty over the trajectory of France’s fiscal sustainability and subsequent credit ratings,” he said.

Still, France’s bond sell-off remains more muted than in 2017 when Le Pen finished second in the first round of voting for the French presidency, pushing the spread in borrowing costs between the Eurozone’s second-largest economy and Germany to 0.8 percentage points.

Since 2017, Le Pen has rowed back on her plans to pull France out of the EU. Analysts say that the widening of the spread this time should be less intense in the coming months, but warned that France’s presidential elections in 2027 could pose a bigger risk to markets should Le Pen remain far ahead in the polls.

“In a nutshell, the key issue for markets is the possible fiscal implications from a Le Pen majority rather than an existential one such as potential Frexit,” said Meera Chandan, global FX strategist at JPMorgan Chase. 

Germany to launch limited military service in push to be ‘war ready’

Increased Russian threat prompts move to a Swedish-style selective approach to army recruitment

Germany is to reintroduce a limited form of military service, though the plan falls far short of the defence ministry’s original goal of restoring the system of conscription scrapped 13 years ago.

“Everyone must ask themselves what they’d be prepared to do if we were attacked,” said defence minister Boris Pistorius on Wednesday. “The question is . . . how do we secure our civilian life if war breaks out?”

Russia’s invasion of Ukraine has prompted Germany to take a much more robust approach to defence, investing heavily in its armed forces and preparing to station an armoured brigade in Lithuania — its first permanent foreign deployment since the second world war.

Pistorius has said the Bundeswehr, the German armed forces, must be made “war ready” as concerns increase about Russian President Vladimir Putin’s aggressive intentions towards Nato, the western military alliance.

Defence ministry officials described the minister’s model, which borrows heavily from a system used by Sweden, as a “selective form of military service based on a voluntary principle but containing obligatory elements if necessary”.

Under the plan, men aged 18 will be required to fill out a form with information about their willingness and ability to serve in the army and then, if selected, to undergo a medical examination. Recruits will then be chosen from those tested.

But opposition politicians expressed disappointment with the proposal. “Considering the minister has been talking about [reintroducing] military service for nine months, the plans are pretty thin and vague,” said Serap Güler, the Christian Democrats’ spokesperson on defence.

Former chancellor Angela Merkel scrapped the military draft in 2011, but the Bundeswehr has since struggled to overcome persistent troop shortages.

The government has plans to increase the size of the army from 182,000 to 203,000 by 2031. But military officials believe it needs as many as 460,000 soldiers to defend Germany in the event of an attack.

Pistorius said his plan would lead to the recruitment of 200,000 reservists — in addition to the 60,000 the Bundeswehr currently has.

Of the 400,000 18-year-olds who would be approached by the Bundeswehr under his plan every year, he estimated about a quarter would likely express an interest in serving. Of these, 40,000 to 50,000 would be invited to undergo a medical examination.

“We will select the most motivated, the fittest and the most suitable,” Pistorius said.

He noted the Bundeswehr only had the capacity to train 5,000 additional recruits a year, though that number would rise in the coming years.

The armed forces had shrunk significantly since the end of the cold war, he said, leading to the divestment of barracks, munition dumps and military accommodation “on a massive scale”, he said.

Those who sign up will be offered six months of basic training which can be extended to a total of 23 months of service. Recruits will then become part of the reserve force, with an obligation to undergo annual training.

Pistorius’s more ambitious plans, including a scheme to bring back compulsory military service, encountered strong resistance from military chiefs, who were wary about an influx of raw, untrained young men, and leftwing politicians in his Social Democrat (SPD) party, who feel uneasy about Germany’s new focus on the military.

Chancellor Olaf Scholz, who like Pistorius is from the SPD, in May said he considered a return to a conscript army “unworkable”.

The ministry then shifted to a hybrid service model, which would not involve mass compulsory service but would instead be aimed at encouraging more voluntary participation. Pistorius was keen to emulate the kind of national service models used in many Scandinavian countries.

The Bundeswehr hopes the model will improve recruitment by identifying potential candidates and encouraging enrolment, through a range of incentives and training opportunities, in understaffed niche fields such as cyber security and medicine.

Innovation prize targeting urinary tract infections boosts effort to tackle pathogens that develop immunity to drugs

A 10-year challenge to find ways to combat the growing scourge of antibiotic resistant “superbugs” has yielded a new generation of diagnostic tests that offer rapid identification of infections. 

The £8mn Longitude Prize was awarded on Wednesday to Sysmex Astrego, a Swedish company whose method cuts the analysis time for urinary tract infection patient samples from two or three days to less than an hour.

The prize is a response to the increasing threat posed by antimicrobial resistance (AMR), or the evolution of pathogens to beat existing essential drugs. Countries are due to hold talks on tackling AMR on the sidelines of the annual UN General Assembly in September.

“Without antibiotics, modern medicine as we know it is in real danger of collapse,” said Dame Sally Davies, UK Special Envoy on AMR and a Longitude committee member. “The prize winner will help healthcare workers around the world make the best decisions for their patients with confidence that they are prescribing the right drug, first time.”

AMR, which has been stoked by the careless use and disposal of existing antibiotics, contributed to almost 5mn deaths worldwide in 2019, according to a 2022 study. Climate change is forecast to intensify its development, as higher temperatures speed bacterial growth and disasters such as flooding spread antibiotic-resistant pathogens.  

Sysmex Astrego has focused initially on urinary tract infections because they are so common, afflicting an estimated 50-60 per cent of women during their lifetimes. It is thought that up to half the bacteria that cause the conditions are resistant to one or more antibiotics.

Deploying technology from Sweden’s Uppsala university, Sysmex uses a smartphone-sized cartridge to analyse tiny samples of less than half a millilitre. Tests suggest it can detect a bacterial infection in 15 minutes and identify the right antibiotic to treat it in 45. Like other emerging technologies up for the Longitude AMR prize, it has potential to be developed to detect other kinds of infection.

Sysmex’s system is on the market in Europe and being considered by UK regulators for adoption in the country’s National Health Service.

Mikael Olsson, Sysmex’s co-founder and chief executive, said the company’s goal was “to be able to roll this technology to as many parts of the world as possible”. It costs about €4,750 for the analysis equipment and €29 per cartridge test, but Sysmex hopes more sales of the product will enable it to scale up manufacturing and reduce prices.

“[The set-up] is very user friendly,” Olsson said. “It’s just plug and play and quite small compared to a lot of the lab systems — so it should be applicable in quite a lot of different settings.”

Another Longitude Prize contender, made by British company Llusern Scientific, aims to ease the problem of antibiotics being prescribed even when no infection is present. It can rapidly confirm the presence of the six most common pathogens that cause 85 per cent of urinary tract infections.

Emma Hayhurst, Llusern’s co-founder and chief executive, said the company had been in talks about licensing production of the technology to Indian manufacturers. She said AMR was “pretty terrifying” but welcomed the renewed focus on it after the Covid-19 pandemic.

“It’s obviously on people’s agenda but there are still some chronic misunderstandings about what it is and what the impact will be on us,” she said. “But I do think governments are beginning to take it seriously.”

The Longitude Prize is funded by Innovate UK, a government agency, and Nesta, a British foundation that works in areas such as health, climate and education. India’s Biotechnology Industry Research Assistance Council and pharmaceutical companies including UK-based GSK and Merck & Co of the US provided funding for entrants’ international development efforts.

Energy watchdog forecasts spare pumping capacity to rise as demand growth wanes and supplies surge

Global oil markets are headed toward a major glut this decade, a global energy watchdog forecast, citing surging supplies and slowing demand growth for crude thanks to lower-emissions energy sources.

The International Energy Agency, whose members include the world’s biggest oil consumers, predicted in its closely watched medium-term oil market report that so-called spare capacity—the amount of pumping capacity left unused because of adequate supply—could surge in coming years to levels only seen during the Covid-19 pandemic.

Oil-demand growth is set to peak by 2029 and start to contract the next year, reaching 105.4 million barrels a day in 2030 as the rollout of clean-energy technologies accelerates, according to the Paris-based organization. Meanwhile, oil-production capacity is set to increase to nearly 113.8 million barrels a day, driven by producers in the U.S. and the Americas.

“This would result in levels of spare capacity never seen before other than at the height of the Covid-19 lockdowns in 2020,” the IEA said on Wednesday. “Such a massive oil production buffer could usher in a lower oil price environment, posing tough challenges for producers in the U.S. shale patch and the OPEC+ bloc.”

Despite the slowdown, global oil demand in 2030 is still forecast to rise by 3.2 million barrels a day from 2023, the agency said. The increase will be driven by strong demand from economies in Asia, particularly in India and China. But rising electric-car sales, fuel-efficiency improvements and the use of renewables for electricity generation will increasingly offset gains.

In advanced economies, demand is forecast to fall from around 45.7 million barrels per day in 2023 to 42.7 million barrels per day in 2030. Excluding the pandemic, the last time that oil demand was that low was in 1991, according to the IEA.

Meanwhile, global production capacity growth will be led by producers outside of the OPEC+ alliance—particularly the U.S., Brazil, Canada, Argentina and Guyana—which are forecast to account for three quarters of the expected increase to 2030.

OPEC+ oil-production capacity is forecast to grow by 1.4 million barrels a day from 2023 through 2030, led by Saudi Arabia, the United Arab Emirates and Iraq. According to the IEA, the group’s total oil market share dropped to 48.5% this year—the lowest since the alliance was formed in 2016—due to its voluntary output curbs.

The IEA cited various risks to its demand forecast, including economic growth estimates, the trajectory of oil prices and the pace of adoption of electric vehicles worldwide.

In the short term, the agency cut its forecast for global oil-demand growth to 960,000 barrels a day this year from previous estimates of 1.1 million barrels a day, as weak deliveries in OECD countries pushed global demand in a narrow contraction in March.

Oil-demand growth for next year is now forecast at 1 million barrels a day, down from 1.2 million barrels a day previously, on lackluster economic growth, the increasing use of electric vehicles and efficiency gains. Total demand is expected to reach an average of 103.2 million barrels a day in 2024 and 104.2 million barrels a day in 2025.

Wednesday’s reports came as Brent crude trades around $82 a barrel, while West Texas Intermediate is around $78 a barrel. Both benchmarks rallied about 3% earlier this week as traders seem to be buying on the back of a dip following an oil selloff sparked by OPEC+’s plan to unwind some of its production cuts.

Prices are supported by expectations that summer fuel demand and output curbs from OPEC+ will lead to a sizable deficit in the third quarter. Bearish sentiment continues to dominate the market, with prospects of higher-for-longer interest rates in the U.S. damping the commodity’s demand outlook.

The agency’s projections remain well below OPEC’s. The cartel forecasts global oil-demand growth of 2.2 million barrels a day this year and 1.8 million barrels a day in 2025.

Total oil supply is now expected to be higher, reaching an average of 102.9 million barrels a day this year and 104.7 million barrels a day the next from previous expectations of 102.7 million barrels a day and 104.5 million barrels a day, respectively, the IEA said. Non-OPEC+ countries are still set to lead global supply, the agency said, with production expected to grow by 1.4 million barrels a day in 2024 and 1.5 million barrels a day in 2025.

OPEC+ production is forecast to fall 740,000 barrels a day this year if the group keeps its voluntary output cuts in place, and to flip to a growth of 320,000 barrels a day the next. The cartel and its allies agreed to extend voluntary curbs of 2.2 million barrels a day to the end of September and said they aim to gradually unwind them from October 2024 to September 2025, contingent on market conditions.

Meanwhile, Russian crude exports rose by 100,000 barrels a day in May to 7.7 million barrels a day, while export revenue fell 0.6% compared with the previous month to $16.8 billion, the IEA said. Russia’s oil production is expected to decrease by 260,000 barrels a day this year to 10.7 million barrels a day as the country carries out deeper OPEC+ production cuts, but supply is forecast to remain broadly steady through 2030 supported by the Vostok Oil project in the Arctic.

Argentina loses appeal over $1.5bn payment to hedge funds

Ruling is setback for Javier Milei’s cash-strapped government as it faces series of cases brought by former foreign investors

A London court has rejected Argentina’s appeal on a ruling that left it facing a $1.5bn payment to four hedge funds who bought its GDP-linked securities, in a blow to the cash-strapped government of libertarian President Javier Milei.

In 2013, Argentina changed the way it calculates GDP, which it argued meant it did not need to pay interest on the euro-denominated securities — issued between 2005 and 2010 as part of a debt restructuring — which were tied to GDP growth.

Palladian Partners, HBK Master Fund, Hirsh Group and Virtual Emerald International Limited, which hold about 48 per cent of the securities and which like many emerging market bonds are governed by English law — brought a case against Argentina in 2019 asking to be compensated for their losses and the court ruled in their favour in 2023.

Argentina’s economy is in the depths of a severe economic crisis, with inflation running close to 300 per cent, foreign exchange reserves dangerously low and billions of dollars in payments to foreign creditors looming. The country’s lawyers had argued that paying the hedge funds would affect its ability to service its other debts and cause “harm to the people of Argentina”.

Buenos Aires has faced a series of legal challenges from former investors, including several dating to the 2007-2015 government of leftist president Cristina Fernández de Kirchner. Last year, a New York court ruled that Argentina was liable to pay $16bn to two former shareholders of state energy company YPF, which was renationalised in 2012 — the largest-ever ruling against a sovereign in a New York court.

Sebastián Maril, a director at consultancy Latam Advisors who has followed Argentina’s overseas litigation closely, said that Wednesday’s ruling was “proof that Argentina’s legal strategy is not working”.

“We have almost always lost these cases, and continuing to appeal and delay is throwing money away and allowing interests and legal costs to build,” he said.

In April, a New York court ruled against plaintiffs in a similar case relating to Argentina’s dollar-denominated GDP-linked securities, saying they had not complied with steps for bringing such a case laid out in the bond contracts. The plaintiffs are appealing.

Earlier this year, as a condition of its appeal Argentina deposited €310mn to be held in escrow pending the London court’s ruling.

It is unlikely that Argentina will be able to pay the full judgment — worth €1.33bn plus interest — in the short term. Its foreign reserves, excluding liabilities, are hovering around zero, even after a months-long push by the new government to build them up.

“The government should sit down with all of its judgment creditors to negotiate a macro deal with them,” said Maril. “Not to pay now, because it’s very difficult to do so, but to agree on a timeline to pay in the future.”

Green party unveils £50bn wealth tax in pitch to disenchanted Labour voters

Anyone with assets above £10mn would face new levy to fund housing and eco policies

The Green party has pledged to impose a dedicated wealth tax on the most well-off to invest in health, housing and a decarbonised economy, as it seeks to capture the imagination of disenchanted Labour voters.

The party on Wednesday said it would introduce a wealth tax of 1 per cent on people with assets above £10mn, and 2 per cent on those with assets of more than £1bn, as well as aligning the rates of capital gains tax with income tax rates.

It also said it would charge the basic 8 per cent rate of national insurance contributions on the upper earnings limit, up from 2 per cent today, which it estimated would impact only 5mn people in the UK. 

These changes would raise between £50bn and £70bn per year in 2024 prices, the party said. It said it would raise up to £80bn from a carbon tax to be set initially at £120 per tonne of carbon emitted, while adding that it was “prepared to borrow to invest” further. 

“Our manifesto is based on investing to mend broken Britain and offer real hope and real change,” Carla Denyer, co-leader of the party, said at the party’s manifesto launch in Brighton on Wednesday. 

“At the heart of this would be a tax on the very richest, the top 1 per cent of people, requiring them to pay a bit more into the pot,” she said. “From the Tories and Labour, we’ve been hearing a race to the bottom on tax.”

The party has sought to expand beyond its core policy focus of the environment and climate to become a foil to Labour, stealing away leftwing voters who feel uninspired or unsatisfied with Sir Keir Starmer’s position on issues ranging from the conflict in Gaza to taxation and public investment.

The Labour party ruled out imposing a dedicated wealth tax last year and has also said it has no plans to bring capital gains tax in line with income tax rates. It has also said it will stick to tight fiscal rules on borrowing, including that debt must be falling as a share of GDP by the fifth year of the forecast — a policy also held by the Conservatives.

In the seven-way BBC leaders’ debate last week, Denyer accused Starmer of having changed Labour “into the Conservatives”.

The Greens are targeting four seats at the election on July 4 including Brighton Pavilion, which they already hold, and Bristol Central, where Denyer is in a tight race with shadow culture minister Thangam Debbonaire. They are also targeting Waveney Valley and North Herefordshire. 

But the party faced a setback last week when it was forced to block four candidates from running in the election after a dossier of information was released about allegedly antisemitic comments the individuals had made, shared or liked online.

The Greens said they would invest £50bn in health and social care to “defend and restore the NHS”, including a guarantee for an NHS dentist for everyone, and £29bn over the next five years to insulate homes. 

They also set out plans to bring water companies, railways and five retail energy companies into public ownership, and to scrap university tuition fees. 

On housing, the party vowed to create 150,000 new social homes every year by the end of the next parliament and invest £30bn over five years to insulate homes.

It also said it would stop all new fossil fuel projects and cancel ones that had been licensed recently, including Rosebank in the North Sea.