Franklin Templeton’s head of fixed income investment warned that ongoing plunges in French bond yields could escalate into a eurozone debt crisis, one potentially more severe than the crisis that began with Greece nearly two decades ago.
Sonal Desai, global chief investment officer for Franklin Templeton Fixed Income, said, “I don’t think anyone is truly prepared for a version 2.0 of the eurozone debt crisis, and if it does happen, this time it could be even worse.”
Although such a scenario has not yet materialized, Desai’s concerns reflect recent trends in France’s borrowing costs and its status as the EU’s second-largest economy. The spread between French and German 10-year government bond yields—the closely watched risk indicator—closed above 1.5 percentage points on Tuesday, the highest level since January 2012.
Desai argued that as one of the founding members of the European Union, France could become a bigger pressure test. With an economy worth 3 trillion euros, France carries total debt of around 3.6 trillion euros.
“France’s debt is over ten times greater than Greece’s. Simple rescue packages won’t work,” she said at the Franklin Templeton Fixed Income Forum.
Still, there are key differences from the past. France remains a borrower with an investment-grade credit rating, and banks holding French government bonds—the primary holders—are in far stronger capital condition than they were in 2010. Moreover, the European Central Bank has demonstrated over the years its ability to manage volatility in bond markets.
Desai noted that Franklin Templeton’s bond portfolio leans toward short-term assets in Italy and France, contrasting with a more positive stance on Spanish and German debt.
“We should not underestimate the potential for significant volatility in the eurozone,” she added.
