France’s banks could come under pressure if widening riots and higher government bond yields trigger deposit flight, Macquarie analysts warned.
The bank said student protesters and unions have spent days marching and clashing with police over conditions in dilapidated French schools. Pupils have complained of overcrowding in classrooms, lack of heating in winter, and lack of air conditioning in summer.
Macquarie analysts Thierry Wizman and Gareth Berry said in a series of notes that if rioters successfully persuade the government to increase education spending, French bond yields could rise further. That, they argued, could raise the risk of capital leaving the country and eventually spilling into France’s commercial banks.
'We can easily see how further increases in sovereign bond yields and/or widening riots can cause deposit flight,' they warned in a note to clients. They added that the rapid rise in U.S. bond yields in late 2022 and early 2023 helped trigger the collapse of Silicon Valley Bank and Republic Bank, along with liquidity interventions from the Fed.
'The rise in underlying yields may be associated with capital fleeing from France,' they said. 'And if this extends to deposit flight from its commercial banks, then the prospect of an ECB intervention ... could be a possibility.'
Macquarie also said there is currently no sign of that happening.
The market lesson is simple: capital runs toward stability and away from political disorder. When riots, higher spending demands and rising yields hit the same economy, the taxpayer eventually absorbs the bill through more borrowing costs, weaker banks or both.
That is the real warning here. Free enterprise depends on confidence, and confidence does not survive long when the state spends under pressure and markets are forced to price the risk. France may not be at the edge yet, but the numbers come first, and the bond market usually votes before politicians do.
