Investors Favour Spain Over France

By Yoruk Bahceli and Belén Carreño

(Reuters) – Investors are requiring more compensation to lend to France compared to Spain, indicating concerns about France’s finances and optimism regarding Spain’s economy.

The preference for Spain was reinforced after France’s unexpected elections in June and July, which negatively impacted recovery prospects.

Here are four key points highlighting Spain’s outperformance relative to France:

1. Milestone

Recently, France’s 10-year government bond yield surpassed Spain’s for the first time since 2008. As of Tuesday, France’s yield was approximately two basis points below Spain’s. This is significant, especially since the yield gap exceeded 500 basis points during the euro zone debt crisis in 2012.

Gareth Hill, portfolio manager at Royal London Asset Management, noted a trend of investors moving from France to Spain. Spain, often viewed as part of the euro zone’s poorer ‘periphery’, may achieve ‘semi-core’ status with bond investors, a title traditionally held by France.

2. Purse Strings

France’s budget deficit is at risk of exceeding 6% of output, which is double the European Union’s 3% limit. Investors are skeptical about improvements under France’s current minority government.

In comparison, Spain’s deficit is expected to be at 3% this year, with no disciplinary actions recommended by the EU. Although Spain’s government also lacks a majority, this has paradoxically helped in maintaining fiscal discipline.

Post-pandemic, Spain has reduced its debt more swiftly than France. Spain anticipates its debt to shrink to under 103% of output this year, while France’s debt is projected to rise.

3. Booming Growth

Spain’s economy is expanding more rapidly than France’s, driven by robust tourism and a strong labour market fueled by immigration. Spain’s economy grew by 2.7% last year, compared to France’s growth of 1.1%. Moreover, Spain’s central bank projects a growth rate of 2.8% for this year.

The EU’s COVID recovery fund has also favoured Spain, with quadruple the amount of funds compared to France. High growth figures suggest that Spain is unlikely to experience severe fiscal constraints.

4. Scorecard

Despite having a lower debt profile and stronger growth metrics, Spain is still rated lower than France by credit rating agencies. Both countries lost their AAA ratings between 2009 and 2012, but Spain has received multiple upgrades since then, whereas France has faced downgrades.

According to Rohan Khanna of Barclays, the market often reacts before the rating agencies, indicating Spain’s current ratings may not accurately reflect its economic performance when compared to France.