The invoice

Yesterday, we looked at how France historically dealt with excessive public debt: through inflation. Todays chart shows that financial markets are becoming increasingly concerned about Frances ability to manage its debt within the constraints of the euro.
The yield on French 10-year government bonds has climbed to 4.93%, compared with 3.40% for German Bunds. The spread has widened to 153 basis points, more than doubling in just a few months and reaching its highest level in two years.Part of the rise in yields reflects a general repricing of European interest rates. But the widening Franco-German spread tells another story: investors are demanding an increasingly substantial risk premium to finance the French state.
And therein lies the problem. Higher borrowing costs make an already difficult fiscal equation even more challenging. France can no longer devalue its currency or independently inflate away its debt as it did in the past. With additional taxation politically and economically difficult, and fiscal consolidation equally challenging, the options are narrowing.
The bond market is now putting a price on Frances political and fiscal paralysis. What started in the streets is increasingly visible in financial markets. And the consequences may eventually be felt well beyond Paris.The bond market is sending a warning. The question is whether French politicians are listening.