Le Pen eyes bond markets with promise of bigger spending cuts if far right wins presidency

Marine Le Pen pledged sharply steeper cuts to spending if ‌she ​wins French presidential elections next year in a signal to jittery bond markets the far-right leader is serious about reining in France's burgeoning debt pile. French borrowing costs have surged in recent days to levels not seen since the early 2000s as France has become a focus of a global bond market rout over ‌its strained public finances and political uncertainty ahead of the April-May two-round election.

"In view of the rise in interest rates and the meagre budget proposed by (Prime Minister) Sébastien Lecornu and (President) Emmanuel Macron, I can announce right now that we are setting the necessary adjustment at €140 billion in net savings in 2032 compared with 2026," Le Pen told journalists on Tuesday. The €125 billion in savings she had originally planned over the course of a five-year presidency were ‌no longer sufficient, she said. Most of the cuts would be achieved in the first three years and come from streamlining the way the government functions, Le Pen said.

The new package would bring France's budget ‌deficit down to an EU limit of 3% of economic output as soon as 2030, down from 5.4% this year, she said. Discussions were needed with the European Central Bank to help ease France's borrowing costs once the country regained control of its public finances. Under her plan France would limit its net contribution to the EU budget to €5 billion, the level it was at in the early 2000s. She said she would present plans to rein in France's increasingly costly pension system in the coming weeks.

SPENDING CUTS France's 10-year bond ⁠yield was ​last down 14 basis points at 4.72%, on track for ⁠its biggest one-day fall since May, part of, but outperforming, a rally in government bonds across Europe.

"I think it (Le Pen's announcement) is contributing to some of the rates relief that we are seeing this morning in that she set out a plan to ⁠try to implement that deficit improvement trajectory going forward," said Laura Cooper, head of macro credit at Nuveen. "But I think the details are what markets are missing. That would be the next stage: how can they implement some of those?" she added.

The ​fiscal turmoil has become a top campaign issue, and convincing financial markets to fund campaign promises will be among the first big challenges for whoever is elected. Le Pen, who is leading ⁠in the polls for the two-round April 18-May 2 election, has sought to build budget credibility with her savings plans.

She said she wanted to enshrine fiscal restraint in the constitution with a referendum on a "golden rule" that would require the budget deficit to be reduced at least ⁠half ​a point annually until the national debt returns to 60% of economic output, down from 119% currently. Le Pen has so far struggled to win over business leaders concerned about her euroscepticism and plans to reverse a contested 2023 pension reform.

"So the RN aims to return (the deficit) to 3%...without touching pensions, by lowering taxes (especially VAT), and even creating a tax credit for cat owners, thanks to the fight against fraud and the reduction ⁠in immigration. That's mathemagical!" said economist Erwann Tison with business think-tank L'Institut de l'Entreprise on X. BUDGET PRESSURE

With investors offloading French assets, prime minister Lecornu's government has sought to calm market jitters by unveiling a 2027 budget ⁠that includes €43 billion of new savings. The fate of France's 2027 ⁠budget in France's divided parliament rests with opposition parties, of which Le Pen's National Rally (RN) is the biggest.

Outlining a shadow 2027 budget, party leader Jordan Bardella demanded €71.6 billion in savings measures, including €28 billion by streamlining spending and €15 billion in cuts to spending that benefits immigrants. Bardella did not rule out backing a no-confidence motion against the ‌government over the budget, but left ‌the door open to a possible abstention.

($1 = 0.8925 euros)