ING strategist warns: France's budget deficit could become a Euro "time bomb"

ING Group NV strategist stated that concerns about France's ability to control its budget deficit are resurfacing in the market, which may start to weaken investors' interest in the Euro. On Tuesday, the Euro fell to a one-month low against the US Dollar, as the minority government in France proposed a radical deficit reduction plan, including the cancellation of two public holidays, sparking political tensions once again. Francesco Pesole, a forex strategist at ING, stated that while the exchange rate fluctuations are mainly driven by the strength of the US Dollar (boosted by US inflation data), it also serves as a warning to investors the second largest economy in the Eurozone is facing serious political and fiscal challenges. In a report on Wednesday, he wrote: "The issue of the French deficit had recently faded from view, but yesterday's developments serve as a reminder that this remains a ticking time bomb that could impact market sentiment in the EU. In the coming months, we may see some chain reactions in the forex market." Prime Minister Franois Beurlieu's proposed 438 billion deficit reduction plan could lead to the government collapsing once again. With a minority in parliament and opposition parties resisting austerity and tax hikes, Berulieu may be forced to resign in a vote of no-confidence in the fall similar to his predecessor Michel Barnier's fate in December last year. On Wednesday, the Euro hovered around 1.16 against the US Dollar. Pesole believes that if US economic data further weakens market expectations of an imminent rate cut by the Federal Reserve, the Euro could fall to 1.15 in the coming days. The spread between French OAT bond yields and German Bunds remained steady at 69 basis points. Continued political risks have been suppressing the performance of French bonds recently, with its 5-year bond yields currently the highest in the Eurozone. Bloomberg MLIV strategist, Ven Ram, stated: "French bonds have a long-term risk premium, with their 10-year bond yields even higher than those of Spain and Portugal, which have lower credit ratings. The current OAT bond prices have already factored in many negative factors and are unlikely to see a significant decline in the short term."