The premium France pays to borrow is the “new normal” as the nation’s finances deteriorate, according to Pacific Investment Management Co (Pimco).

The extra yield investors demand to hold French bonds versus German debt is hovering around 70 basis points amid the ongoing political confusion and budget concerns since President Emmanuel Macron held a snap election in June.

The spread reflects “the increased fiscal uncertainty”, Nicola Mai, a sovereign credit analyst at Pimco, told Bloomberg TV.

While Macron is expected to name the next prime minister in the coming days, the centrist government that likely emerges will be “weak” and faces “tough” negotiations with the European Commission in the fall, Mai said.

Finding a new head of government is increasingly urgent as France prepares next year’s budget. A caretaker administration has governed since the election in June and investors are watching closely after sending French borrowing costs soaring on concern a new administration won’t control the nation’s large fiscal deficits.

According to research by Bloomberg Economics, the French yield will hold north of 70 basis points through 2024 before widening significantly in 2025. Though borrowing costs will drop as the European Central Bank (ECB) cuts rates in the coming months, riskier French bond yields won’t decline as much as safer German bonds in 2025, the research predicts.

The spread between French bonds and German debt blew out in June to the widest since the euro-area debt crisis in 2012. The premium was below 50 basis points before Macron called the snap vote.

Despite the challenges faced by France and other European countries managing their debt burden, Mai said he sees a low risk of another sovereign debt crisis in the region.

“The fiscal infrastructure has improved. The ECB has asserted its role as a lender of last resort,” Mai said.

“Nonetheless, I think fiscal dynamics are challenged in several countries apart from Germany. We’ll see a bit of a higher credit spread, including France.”

  - Bloomberg