Wednesday, July 24, 2024
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French markets suffered a brutal sell-off on Friday, as political uncertainty led to the biggest weekly jump in the premium investors demand to hold French government debt since 2011. The country’s finance minister, Bruno Le Maire, warned that France faces the risk of a financial crisis after being thrown into turmoil by President Emmanuel Macron’s decision to call snap elections.

The National Rally (RN), led by Marine Le Pen, is currently leading in opinion polls and is calling for a lowering of the retirement age and a protectionist “France first” economic policy approach. This has led to concerns about France’s fiscal discipline and has caused the premium investors demand to hold French government bonds over euro zone benchmark Germany to rise to its highest level since 2017.

French banks were hit hard, with the country’s biggest three – BNP Paribas, Credit Agricole, and Societe Generale – losing between 10-15% in value this week, the most since the banking crisis of March 2023. The CAC 40 index was last down 1.4%, heading for a weekly loss of 5%, its largest since early 2022, and underperforming the regional STOXX 600 index.

The euro touched a one-month low at around $1.0690 and was last down 0.5%. The possibility that the RN could win has compounded investor concerns around France’s fiscal discipline. The first round of voting takes place on June 30.

France’s debt to gross domestic product ratio is above 100%, and its deficit is around 5%. Its credit rating was downgraded last month by S&P Global. It now costs the French government more to borrow money for 10 years than it does the Portuguese government for the first time since at least 2005, according to LSEG Datastream.

Analysts believe that the decision by France’s left-wing parties to form a ‘Popular Front’ has added to selling pressure, as it dents Macron’s chances of emerging victorious in the election. “It’s really hard to ignore the parallels from the situation of 2011-2012 in the sovereign debt crisis,” said Justin Onuekwusi, chief investment officer at investment firm St. James’s Place. “If you go back to that period, very similar themes — elections, sovereign debt spreads, debt sustainability in focus with no real sign of what’s going to stop this momentum.”

The French state-backed finance body SFIL postponed a bond sale on Friday, a lead manager memo seen by Reuters, in a sign of how market unease was rippling out. “In terms of positioning, fast money accounts have been short France over the last few months. However, real money accounts, institutional accounts, and Asian real money are long France,” said Jefferies analyst Mohit Kumar. “As these accounts seek to exit their positions or reduce exposure, buyers are unlikely to step in given that elections are just three weeks away.”


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