LONDON (Reuters) — France's 10-year borrowing costs climbed to their highest level compared with Germany in a year and a half on Tuesday, as French President Emmanuel Macron announced spending measures in a bid to restore calm after weeks of violent protests.
Macron announced wage rises for the poorest workers and tax cuts for pensioners late on Monday, measures that are expected to increase public spending by 8 billion (C$12.1 billion) to 10 billion euros.
France's 10-year bond yield rose by five basis points to 0.756 per cent on Tuesday, before easing to around 0.73 per cent. The spread over equivalent German bonds hit 47.5 basis points, its widest level since May 2017.
"The measures suggest there will be more spending from the French government, which implies a higher deficit in 2019 and weakens the financial position," said Commerzbank rates strategist Rainer Guntermann.
"French newspapers are suggesting this morning that we could have a 3.5 per cent deficit in France in 2019, which complicates the discussion in the euro area and gives other countries such as Italy an argument for a higher deficit."
The French newspaper report in question, which cited officials as saying the measures could push the country's budget deficit to 3.5 per cent of gross domestic product, does not take into account any spending cuts or tax increases that may be announced.
Asked whether the budget deficit would be kept below the euro zone's limit of three per cent of GDP, an Elysee official said France had some room on spending if a one-off tax rebate, which inflates the deficit by 20 billion euros in 2019, was not taken into account.