Concerns have been raised by investors on the possibility of a financial catastrophe in France in the event that the political center fails to emerge victorious in the next parliamentary elections.
This would result in far-right populists taking control of the second-largest economy in the European Union.
After his party was defeated by the extreme right in a vote for EU representatives, President Emmanuel Macron called for the emergency elections on Sunday. This unexpected action caused the markets for French equities and government bonds to be shaken up.
Since then, there has been a great deal of speculation that the National Rally, which is the party of Marine Le Pen, a prominent figure on the extreme right, is on the verge of becoming the most powerful force in parliament, so unseating Macron’s centrist group.
The burden of France’s enormous government debt, which was equivalent to 110.6% of the country’s gross domestic product at the end of the previous year, may be made more difficult by such a result, and it could even make the situation worse. In addition, a parliament that is deeply split would have a difficult time reducing the budget deficit, which is defined as the difference between the amount of money the government spends and the amount of money it receives in taxes. In the previous year, the budget deficit reached 5.5% of GDP.
“If Le Pen calls the shots in parliament and pursues major parts of her expensive fiscal and protectionist ‘France first’ agenda, the result could be a financial crisis similar to the one that Liz Truss experienced,” analysts from Berenberg said in a note on Friday. They added that for the time being, this was “a serious risk, not a forecast.”
As a result of former Prime Minister Truss’s announcement in September 2022 that he intended to raise borrowing in order to pay for tax cuts, the British pound and UK government bonds saw a significant decline in value. As a result of investors’ desire for much greater premiums for ownership of UK debt, mortgage rates skyrocketed. Soon after that, Truss resigned, making him the prime minister with the shortest tenure in the history of the United Kingdom.
Bruno Le Maire, the minister of finance for France, has said that there is a genuine possibility that something like may occur in France.
When asked on Friday by franceinfo, a French radio station, if the political uncertainty that was caused by Macron’s decision to call the snap elections may lead to a financial catastrophe, Le Maire responded with a “yes.”
He made the observation that in order to borrow money from investors, France is now required to pay a higher interest rate than Portugal, which was one of the nations that was bailed out during the European financial crisis that occurred more than a decade ago. In his statement, Le Maire said that “this comes down to the plans that are on the table from the parties,” referring to whether or not we are able to fund this debt.
Credit rating agencies are already keeping a careful watch on France, which is one of the three nations in the European Union that has the highest level of debt. S&P said in May that the country’s long-term credit score had been lowered to AA-, citing the “deterioration of (its) budgetary position.” Despite this, the rating agency continued to believe that France had sufficient ability to service its obligations. In 2027, the agency said that it anticipated the budget deficit to decrease to 3.5% of GDP, which is far higher than the 2.9% objective that the present administration has set for itself.
The possibility of political instability is already causing the markets to get agitated. On Friday afternoon in Europe, the yield, which refers to the interest rate that investors are looking for, on France’s benchmark 10-year government bonds was 3.17%. This difference was compared to the yield of 3.15% for the Portuguese similar securities.
On Thursday, the premium that traders demand to keep French government bonds rather than the ultra-safe AAA-rated German counterparts reached its highest level since 2017. This is just another indication that traders are experiencing worries. By Friday, the gap between the two groups had become even wider.
There is no escape for the stock markets. When compared to comparable German and pan-European indices, the French benchmark of forty prominent firms had a far greater decline on Friday. Also falling this week is the value of the euro.
According to the results of an opinion survey conducted by Elabe for the CNN station BFMTV and La Tribune Dimanche on Wednesday, the centrist coalition led by Macron was on pace to finish in third place in the first round of elections on June 30. This would be a significant distance behind the National Rally and an alliance of left-wing parties.
It has been pledged by the National Rally that they would increase public expenditure and reduce the value-added tax on gasoline and electricity. The answer that the markets would give to such measures, according to Le Maire, would be something along the lines of “I’m sorry but you don’t have the means to afford these expenses.”
Frank Gill, a senior expert in European sovereign ratings at S&P Global Ratings, said that the policies espoused by the National Rally “could further drag on public finances” and “would be a consideration for the sovereign rating.” This statement was made during a webinar that took place on Thursday.
In a report that was published on Monday, Moody’s said that the snap elections had raised the risks to fiscal consolidation in France, which is considered “a credit negative.”
According to a report published by Berenberg earlier this week, the European Central Bank “would have the means to prevent any genuine crisis” in the market for French government bonds. In contrast, “the European Central Bank may only deploy its instruments — or announce that it could do so — if and when the country in question has returned to sounder fiscal policies,” as stated in the article. This is similar to the sequence of events that occurred during the former euro crisis.
Concerns have been raised by investors on the possibility of a financial catastrophe in France in the event that the political center fails to emerge victorious in the next parliamentary elections. This would result in far-right populists taking control of the second-largest economy in the European Union.
After his party was defeated by the extreme right in a vote for EU representatives, President Emmanuel Macron called for the emergency elections on Sunday. This unexpected action caused the markets for French equities and government bonds to be shaken up.
Since then, there has been a great deal of speculation that the National Rally, which is the party of Marine Le Pen, a prominent figure on the extreme right, is on the verge of becoming the most powerful force in parliament, so unseating Macron’s centrist group.
The burden of France’s enormous government debt, which was equivalent to 110.6% of the country’s gross domestic product at the end of the previous year, may be made more difficult by such a result, and it could even make the situation worse. In addition, a parliament that is deeply split would have a difficult time reducing the budget deficit, which is defined as the difference between the amount of money the government spends and the amount of money it receives in taxes. In the previous year, the budget deficit reached 5.5% of GDP.
“If Le Pen calls the shots in parliament and pursues major parts of her expensive fiscal and protectionist ‘France first’ agenda, the result could be a financial crisis similar to the one that Liz Truss experienced,” analysts from Berenberg said in a note on Friday. They added that for the time being, this was “a serious risk, not a forecast.”
As a result of former Prime Minister Truss’s announcement in September 2022 that he intended to raise borrowing in order to pay for tax cuts, the British pound and UK government bonds saw a significant decline in value. As a result of investors’ desire for much greater premiums for ownership of UK debt, mortgage rates skyrocketed. Soon after that, Truss resigned, making him the prime minister with the shortest tenure in the history of the United Kingdom.
Bruno Le Maire, the minister of finance for France, has said that there is a genuine possibility that something like may occur in France.
When asked on Friday by franceinfo, a French radio station, if the political uncertainty that was caused by Macron’s decision to call the snap elections may lead to a financial catastrophe, Le Maire responded with a “yes.”
He made the observation that in order to borrow money from investors, France is now required to pay a higher interest rate than Portugal, which was one of the nations that was bailed out during the European financial crisis that occurred more than a decade ago. In his statement, Le Maire said that “this comes down to the plans that are on the table from the parties,” referring to whether or not we are able to fund this debt.
Credit rating agencies are already keeping a careful watch on France, which is one of the three nations in the European Union that has the highest level of debt. S&P said in May that the country’s long-term credit score had been lowered to AA-, citing the “deterioration of (its) budgetary position.” Despite this, the rating agency continued to believe that France had sufficient ability to service its obligations. In 2027, the agency said that it anticipated the budget deficit to decrease to 3.5% of GDP, which is far higher than the 2.9% objective that the present administration has set for itself.
The possibility of political instability is already causing the markets to get agitated
On Friday afternoon in Europe, the yield, which refers to the interest rate that investors are looking for, on France’s benchmark 10-year government bonds was 3.17%. This difference was compared to the yield of 3.15% for the Portuguese similar securities.
On Thursday, the premium that traders demand to keep French government bonds rather than the ultra-safe AAA-rated German counterparts reached its highest level since 2017. This is just another indication that traders are experiencing worries. By Friday, the gap between the two groups had become even wider.
There is no escape for the stock markets. When compared to comparable German and pan-European indices, the French benchmark of forty prominent firms had a far greater decline on Friday. Also falling this week is the value of the euro.
According to the results of an opinion survey conducted by Elabe for the CNN station BFMTV and La Tribune Dimanche on Wednesday, the centrist coalition led by Macron was on pace to finish in third place in the first round of elections on June 30. This would be a significant distance behind the National Rally and an alliance of left-wing parties.
It has been pledged by the National Rally that they would increase public expenditure and reduce the value-added tax on gasoline and electricity. The answer that the markets would give to such measures, according to Le Maire, would be something along the lines of “I’m sorry but you don’t have the means to afford these expenses.”
Frank Gill, a senior expert in European sovereign ratings at S&P Global Ratings, said that the policies espoused by the National Rally “could further drag on public finances” and “would be a consideration for the sovereign rating.” This statement was made during a webinar that took place on Thursday.
In a report that was published on Monday, Moody’s said that the snap elections had raised the risks to fiscal consolidation in France, which is considered “a credit negative.”
According to a report published by Berenberg earlier this week, the European Central Bank “would have the means to prevent any genuine crisis” in the market for French government bonds. In contrast, “the European Central Bank may only deploy its instruments — or announce that it could do so — if and when the country in question has returned to sounder fiscal policies,” as stated in the article. This is similar to the sequence of events that occurred during the former euro crisis.
