The Zhitong Finance App learned that as market concerns about France's financial situation and political situation spread to the credit market, the credit risk index for major French bank bonds rose markedly. According to the data, the credit default swap (CDS) spreads of Société Générale, BNP Paribas, and Crédit Agricole have all been significantly higher than those of major banks in the UK, Germany, Switzerland, and Spain. Among them, the default insurance costs for some Société Générale bonds have already exceeded similar debts of Deutsche Bank.
This change shows that the recent pressure on the French sovereign bond market is gradually being transmitted to the bank credit market. The yield on French 10-year treasury bonds has risen sharply in recent months, and its yield premium over German treasury bonds for the same period has recently risen to the highest level since the Eurozone debt crisis.
Bank of France's credit risk index rises, Société Générale's default insurance costs surpass Deutsche Bank
According to data, on Monday, Société Générale purchased default protection for 10 million euros (about 11.2 million US dollars) of five-year internal relief debt. The annual cost has already risen to 103,000 euros. In contrast, purchasing the same level of default protection for similar debts by Deutsche Bank would cost around 16,500 euros less per year. Based on this calculation, the associated costs are approximately €86,500.
This gap has widened rapidly recently. At the end of August, Société Générale and Deutsche Bank's default insurance costs for similar debts were still at the same level. Credit default swaps are usually used by investors to hedge against the risk of default on debt issuers, and widening interest spreads generally mean that the market requires higher credit risk compensation. As a result, the Bank of France CDS spreads rose, reflecting increased investors' concerns about their credit risk.
Not only Société Générale, but also the CDS interest spreads of the other two largest French banks, BNP Paribas and Crédit Agricole, are now significantly higher than those of large banks in the UK, Germany, Switzerland, and Spain.
In fact, before September, the CDS spreads of the largest French banks were already higher than those of their European peers. French political risk has continued to ferment over the past few years, and uncertainty has further intensified in recent weeks, making this gap even more obvious.
Fiscal concerns and political uncertainty are putting pressure on France's sovereign debt
Behind the rise in credit risk of the Bank of France, market concerns about the country's financial prospects and political situation continue to heat up. France's budget proposal announced last week was described as “optimistic” by the country's financial supervisory authority, further drawing investors' attention to the financial situation. Meanwhile, as next year's presidential election approaches, political uncertainty has also become a source of concern for the market. The potential second-round showdown pattern reflected in recent polls has further increased investors' uncertainty about future policy directions.
These concerns were first reflected in the French treasury bond market. French 10-year treasury yields have risen markedly in recent months, and their yield premium over German 10-year treasury bonds recently hit the highest level since the Eurozone debt crisis.
Interest spreads on French and German treasury bonds are generally regarded as an important measure of the extent of market concerns about French sovereign risk. The widening spread means that investors are demanding higher risk compensation when holding French treasury bonds.
ING Bank strategists Jeroen van den Broek and Timothy Rahill said in a report on Monday that rising interest rates, rising fiscal concerns, and heightened uncertainty have finally broken the recent relatively calm situation in the euro credit market. The two strategists pointed out that the weakness of French-related assets is most obvious, but pressure has also begun to spread to European peripheral markets.
Pressure on sovereign bonds spreads to credit markets, and the Bank of France bears the brunt
The reason why banks are vulnerable to rising sovereign risk is, on the one hand, because banks themselves may hold a large number of sovereign bonds; on the other hand, their loan business may also be indirectly affected by changes in fiscal policy, economic growth, and the financing environment.
When the yield on a country's government bonds rises significantly, bond assets held by banks may face price pressure. At the same time, higher market interest rates may drive up financing costs for businesses and households, which in turn affects credit demand and borrowers' ability to repay their debts.
Furthermore, if fiscal and political uncertainty continues to affect economic activity, banks' asset quality and future profit prospects may also be indirectly affected. Therefore, there is often a close link between sovereign debt risk and bank credit risk.
CDS interest spreads of major French banks have widened further recently, indicating that concerns previously focused on the sovereign bond market are being transmitted to financial institutions for credit risk pricing.
Notably, this change also echoes the recent pricing differentiation between different asset classes in Europe. Previously, the yield premium on French treasury bonds compared to German treasury bonds had expanded significantly, while the overall performance of the European stock and corporate credit markets was relatively stable. Today, the CDS interest spreads of large French banks have widened further, which means that the pressure released by the sovereign bond market is beginning to leave a more obvious mark on the credit market.