French Markets Reeling: Political Turmoil Sparks Bond Sell-Off, Bank Stocks Tumble

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French markets experienced a significant sell-off on Friday, driven by political uncertainty that led to the largest weekly increase in the premium investors demand to hold French government debt since 2011. The turmoil comes in the wake of President Emmanuel Macron’s unexpected decision to call a snap parliamentary election, with Marine Le Pen’s far-right National Rally (RN) leading in opinion polls. 

Finance Minister Bruno Le Maire warned of the potential for a financial crisis if the far-right were to win, adding to investor concerns. Le Pen’s party advocates for policies such as lowering the retirement age, reducing energy prices, increasing public spending, and adopting a protectionist “France first” economic stance.

French bank stocks suffered heavily, with BNP Paribas, Credit Agricole, and Societe Generale losing between 12% and 16% of their value this week, the most significant drop since the banking crisis of March 2023. The premium on French government bonds over the euro zone benchmark Germany rose to its highest level since 2017, nearly 80 basis points, with a weekly increase of roughly 25 basis points, the biggest since 2011 during the euro zone sovereign debt crisis.

Investment firm St. James’s Place’s chief investment officer, Justin Onuekwusi, noted the similarities to the 2011-2012 sovereign debt crisis, pointing to elections, sovereign debt spreads, and concerns over debt sustainability. Stock-market volatility surged on Friday, marking its highest single-day rise since last July, with the cost of insuring the debt of major French banks reaching its highest level since the start of the year, according to S&P Global Market Intelligence.