The French financial markets reacted with strong nervousness to the resignation of Prime Minister Sébastien Lecornu, who triggered a new wave of political uncertainty in Paris. The premier’s decision, which remained in office only 27 days – a negative record in the history of the fifth republic – fueled the fears of an imminent dissolution of the National Assembly and early elections.
After the news, the CAC 40 on the Paris Stock Exchange lost 1.5%, with banks among the most affected securities, while the returns of the government bonds at ten years of age have jumped up to 3.61%, also exceeding the Italian BTO, with a spread compared to the German bunds at the highest level of the year. The euro also sold ground, going down by 0.7% against the dollar, a sign of the growing distrust of international investors.
The shadow of political paralysis and the Macron risk
The French crisis is not only economic, but also institutional. Lecornu is the fourth premier to leave the assignment under the presidency Macron, immediately before him he touched Francois Bayrou, a symptom of an increasingly profound political paralysis. The main node remains the difficulty of approving a budget that imposes cuts in shopping and tax increases to contain the highest deficit of the eurozone. The risk now is that the series of unable governments to govern force Emmanuel Macron to a step back, hypotheses that would further aggravate the crisis. Fitch Ratings recently downgraded France to “A+” from “AA-“, a level lower than the United Kingdom and in line with Belgium, reporting a loss of trust in the country’s financial solidity.
French banks under pressure, but solids solid
The political storm has affected the banking sector in particular. The titles of Société Générale, Crédit Agricultural and BNP Paribas lost over 5%, while a company Barclays basket with over 30%of the revenues generated in France fell by 3.8%. The vulnerability of the European banks to the French debt trend is high: about 500 billion euros of French sovereign securities were in their financial statements a year ago, equal to 23% of the total public bonds held by the European Union banks. However, Fitch analysts point out that the fundamentals remain robust and that most of the revenues of CAC 40 – about 80% – comes from foreign markets, reducing the direct impact of the political crisis on the real economy.
Macron under siege, uncertainty towards dissolution
On the political front, the pressure on Macron grows now by hour. Different forces, from the extreme right of Marine Le Pen to the center -right of the Républicains, openly ask for the resignation of the president or, alternatively, new elections. Former premier Bernard Cazeneuve speaks of “faltering institutions” and “irresponsibility at the highest levels”, while Jean-Luc Mélenchon and the left of the new popular front invoke an answer “that returns voice to the people”. Some observers now consider an inevitable a dissolution of the national assembly, with the risk of a long period of instability that could continue to weigh on the markets. “There is no panic, but investors sell,” Nicolas Forest of Cantiam observed. If the crisis does not find a short-haired political solution, the Franco-German spread could expand up to 100 basis points, marking a new phase of vulnerability for the second economy of the Eurozone.
