ING: French budget deficit threatens euro stability and debt markets

Renewed concerns about the growth of France's public budget deficit are affecting financial stability and weakening interest in the euro. ING Groep NV strategists predict that the growing budget deficit could reduce demand for the European currency.

This week, French Prime Minister Francois Bayrou proposed a 43.8 billion euros ($50.8 billion) plan to reduce the deficit, involving spending cuts and tax increases. However, due to the lack of a parliamentary majority, it is unlikely that this plan will be adopted. This could lead to the collapse of the government, as has happened before.

Francesco Pesole of ING says that political instability could weaken the euro to $1.15. Markets have already priced in a significant portion of the risks in French bond prices, but a further decline is not expected at this time. Dubai-based macro strategist Ven Ram notes that French bond yields already factor in negative scenarios.