UBS: Britain could become an ‘island’ of stability as France’s debt crisis consumes it

UBS warns that Britain could become an “island of stability” on the financial markets, as France is roiled by Emmanuel Macron’s debt binge.

Shahab Jalinoos, UBS, said that the UK’s reputation of being Europe’s “problem-child” could be reversed due to increased political uncertainty after Macron called for a snap election.

He said that Britain’s “position is very different from the French case where there’s a risk of clashing with the EU Commission”, for starters, after Brussels criticized Mr Macron’s borrowing spree.

After his party’s poor showing in the European Parliament vote, the French president called for a snap election. This has raised fears that the extreme Right led by Marine Le Pen could gain even more influence.

The financial markets were roiled by the fear of debt investors who feared that this could lead to more borrowing.

Mr Jalinoos stated that the extreme Left also proposes radical policies in France.

He said: “In this context, the UK could actually look like an island or stability after 10 years looking like the problem children in Europe. Finally, the situation could turn around.”

From the perspective of the pound, this is probably a positive thing.

He said that Britain’s appeal could increase if the far Right does well in the German elections next spring. This could push up the pound as much as 10%.

His comments followed the European Commission’s warning that France could face fines if its finances aren’t brought under control.

On Wednesday, policymakers at Brussels announced that France was one of seven countries being monitored because it has a large deficit.

France is now in the so-called excessive debt procedure. This can lead to a fine for not reducing borrowing.

The French president’s reprimand has come at the worst time possible. He has caused a period political and financial turmoil after calling an early election in this month.

Investors are worried that if Mr Macron loses to Mrs Le Pen and her National Rally Party, interest rates will rise.

The European Commission warned Wednesday that the President’s economic plan would lead to spiraling debts. They claimed this demonstrated “high risks on the medium-term”.

According to the EU’s 10-year baseline projection, France’s debt will rise to 139pc by 2034 from just above 110pc at present.

The debt trajectory is sensitive for macroeconomic shocks.

France and Giorgia Melons’ Italy are both in violation of the budget deficit rules that require borrowings to be less than 3pc per annum of GDP.

The European Commission will now propose to the seven countries ways they can reduce their borrowing.

After being suspended during the pandemic, and energy crisis, the rules are now back in effect.

Official figures indicate that the French government plans to run a surplus of more than 5% of GDP in this year. Borrowings are not expected to drop below 3 % over the next few years.

According to the International Monetary Fund, France is expected to still have a deficit of nearly 4pc in 2029.

According to the European Commission, the national debt of the country is expected to reach 112,4pc in this year. This is far higher than the 60pc target set by the European Commission and it’s going the wrong way.

The announcement comes in a period of high interest rate and low economic growth.

The Commission stated: “Risk factors include the recent rise in interest rates, government short-term debt, and expected increases in gross financing requirements over the medium-term. Also, contingent liability risks from the private sector are possible, such as the materialisation of guarantees given by the state to companies and self-employed in the Covid-19 crises.

The recent increase in debt maturity and the relatively stable funding sources are risk-reducing factors.

This comes after Standard and Poor’s, the credit rating agency, downgraded France’s credit rating last month. It’s a sign analysts are becoming increasingly worried about the government’s high borrowing.

Bruno Le Maire has warned since Mr Macron called the snap elections earlier this month that a victory for Mrs Le Pen’s party could lead to a debt crisis “like Liz Truss”.