French markets caught in storm as bonds, bank stocks hit

By Amanda Cooper and Harry Robertson

LONDON (Reuters) – French markets suffered another sharp sell-off on Friday as political uncertainty triggered the biggest weekly rise in the premium demanded by investors to hold French government debt since 2011 and bank shares rose fall.

French Finance Minister Bruno Le Maire warned that the eurozone’s second-largest economy faces the risk of a financial crisis after being thrown into turmoil by President Emmanuel Macron’s decision to call early elections.

Marine Le Pen’s eurosceptic National Rally (RN), currently leading in opinion polls, is calling for a lowering of the retirement age and a protectionist “France First” economic policy approach.

French banks have been hit hard. The three largest in the country – BNP Paribas, Crédit Agricole and Société Générale – lost between 10 and 15% in value this week, the biggest loss since the banking crisis of March 2023.

The premium that investors demand to hold French government bonds over Germany, the euro zone benchmark, has reached its highest level since 2017, at around 77 basis points.

A rise of around 25 basis points was expected this week, the biggest weekly rise since 2011, when the euro zone was in the grip of a sovereign debt crisis that led to multiple bailouts from governments and banks. banks worth trillions of dollars.

“It’s really hard to ignore the parallels with the 2011-2012 situation when it comes to the sovereign debt crisis,” said Justin Onuekwusi, chief investment officer of investment firm St. James’s Place.

“If you go back to this period, very similar themes are in focus: elections, sovereign debt spreads, debt sustainability, with no real sign of what is going to stop this momentum.”

French public financial body SFIL postponed a bond sale on Friday, according to a note from the main manager seen by Reuters, a sign of the concern felt in the markets.

The CAC 40 last fell 1.4%, heading for a 5% weekly loss, the biggest since early 2022, and underperforming the regional STOXX 600 index, down just 1.8 % over the week.

The decision by French left-wing parties to form a “Popular Front” added to the selling pressure by reducing Macron’s chances of winning the election, analysts say.

The euro hit a one-month low at around $1.0690 and was last down 0.5%.

The possibility of an RN victory has worsened investors’ concerns about French budgetary discipline. The first round of voting takes place on June 30.

France’s debt-to-gross domestic product ratio is over 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 over 10 years than the Portuguese government for the first time since at least 2005, according to LSEG Datastream.

“In terms of positioning, fast money accounts have been short in France over the past few months. However, real money accounts, institutional accounts and Asian real money accounts are long in France,” said Mohit Kumar, analyst at Jefferies.

“As these accounts look to exit their positions or reduce their exposure, buyers are unlikely to step in given the election is three weeks away.”

(Additional reporting by Tassilo Hummel in Paris and Dhara Ranasinghe and Harry Robertson in London; editing by Dhara Ranasinghe)