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France’s widening bond spread has revived memories of the euro crisis, but the article’s warning is aimed less at governments than at traders. A sound diagnosis of weak public finances does not guarantee a profitable bet against sovereign debt. Markets move through a sequence of economic, political and financial events, and being right about the final outcome can still mean going broke along the way.

France revives an old fear

In early October the yield on ten-year French government bonds stood 1.6 percentage points above the yield on equivalent German debt, the widest gap since 2011. Street protests and a large budget deficit made the divergence look like another test of the euro area’s basic flaw: countries share a currency but retain separate debts and fiscal politics.

The situation remained far calmer than the turmoil of 2009-12. France’s sell-off had not spread far to neighbouring countries, European bank shares were still up 10-15% for the year, and the old feedback loop between fragile banks and over-indebted governments had not returned. Yet the 2027 presidential election could intensify the strain. Marine Le Pen has promised an unaffordable halt to increases in the pension age, while Jean-Luc Melenchon has threatened a selective default.

That uncertainty may tempt investors to short French or other vulnerable European bonds. The last crisis, however, showed how difficult such trades can be.

Correct economics can lose to politics

During the euro crisis, many investors concluded that the currency union could not survive its economic contradictions. More than 70% expected a member to leave within a year. Hedge-fund manager John Paulson put the probability of a break-up at 50% shortly before Mario Draghi, then president of the European Central Bank, promised to do whatever was necessary to preserve the euro.

The sceptics understood the costs of keeping the union together but underestimated governments’ willingness to pay them. Greece, Ireland and Portugal accepted severe economic pain rather than leave, while other members bent rules and built new support mechanisms. Paulson’s funds suffered double-digit losses in the year of Draghi’s intervention. The trade failed because political commitment overpowered the economic case for rupture.

Even advance knowledge of political events may not solve the problem. In a 2023 experiment, finance and business students received the next day’s front page of The Wall Street Journal before placing bets on American bonds and shares. Despite knowing the news, they predicted the direction of markets only 52% of the time. Events matter, but prices depend on expectations, positioning and the path from headline to reaction.

Timing can defeat a sound conclusion

MF Global illustrates a different danger. Its chief executive, Jon Corzine, believed European leaders would ultimately prevent sovereign defaults. He was right: the bonds on which the brokerage had bet did not default. But their value as collateral fell sharply before Europe completed its rescue. The leveraged firm could not survive the intervening losses and collapsed in 2011.

The lesson is that a correct long-run forecast is not enough when leverage, collateral calls or impatient clients impose short-run limits. An investor must predict not only what politicians will eventually decide, but also when they will decide it and how markets will behave beforehand.

That makes restraint a legitimate edge. Hedge-fund manager Alan Howard avoided betting on the euro crisis because its resolution would be political and his firm had no special advantage in reading it. France may eventually force Europe into another consequential decision, but today’s orderly sell-off could worsen, reverse or linger before that point arrives.

The euro’s survival once seemed as mysterious as a bumblebee’s flight. Biology has explained the insect; markets shaped by economics, politics and financing constraints remain harder to master. The practical takeaway is not that European sovereign debt is safe, but that recognising danger and profiting from it are very different skills.