In 2012, a handful of countries stood at the heart of the sovereign debt crisis that rattled Europe. From that era, one acronym endured: the PIIGS (Portugal, Italy, Ireland, Greece, and Spain). Since then, however, most of these nations have successfully turned their public finances round.
Today, three countries are coming under intense market scrutiny: Britain, Italy, and France. To describe them, Craig Inches, a manager at Royal London Asset Management, uses the acronym BIF. These three nations share particularly high levels of both debt and deficits, placing them on the front line whenever interest rates rise.
The conflict in Iran has sent yields soaring as inflation once again dominates the news. Traders, who at the start of the year were positioned for rate cuts, have changed their minds, now anticipating hikes.
The sharp rise in interest rates also reflects expectations of wider deficits. On one hand, this is due to emergency measures implemented to mitigate the crisis. In Italy, for instance, fuel tax cuts have an estimated cost of €417m.
On the other hand, the war in Iran has reinforced the necessity of investing to reduce fossil fuel dependency and bolster defense capabilities. Last week, the French government proposed an update to its military programming law (LPM), which would result in a €36bn increase in defense spending over 2024-2030.
In MarketScreener columns, this week we noted that equity markets have moved past the Iranian conflict, with US indices hitting new record highs. In the fixed-income space, the mood is somewhat different. While there was some relief following the announcement of a ceasefire between Iran and the United States ten days ago, yields remain high. The French 10-year yield climbed to 3.89% in late March, its highest level since 2009. It stands at 3.67% this morning, still over 40 basis points above its level in late February.
Political instability is another factor keeping the BIFs at the center of investor concern. Since the dissolution of the National Assembly in June 2024, France has seen four different governments, and passing a budget has become a grueling ordeal. In the UK meanwhile, Labour has been in power for almost two years, although Keir Starmer appears weakened, with the trauma of the Liz Truss era still fresh in the minds of investors.
Historically, Italy was the country plagued by chronic political instability. However, since 2022, Giorgia Meloni has managed to break this Italian curse. Her government could become the longest-running since World War II this year, surpassing the record held by the Berlusconi II administration (3 years, 10 months and 12 days).
