Photo: Bartek Szewczyk Getty Images iStockphoto A rise to power of the National Rally also increased the borrowing rates of the French state.
Juliette Vilrobe – Agence France-Presse in Paris
Posted at 8:45 a.m. Updated at 9:00 a.m.
- Europe
The surprise announcement of legislative elections in three weeks in France caused a sudden fall in the Paris Stock Exchange, plunged into uncertainty in the face of the possibility of an arrival of the far right to the French government.
The prospect of the National Rally, which triumphed in the European elections on Sunday, potentially coming to power in July, was also pushing up the French state's borrowing rates.
Financial markets don't like vagueness. However, “the latest events create uncertainty at a time when the latest results, both economic and budgetary, are quite mediocre,” explains Bruno Cavalier, chief economist at Oddo BHF.
Ten days ago, France saw its credit rating downgraded by one notch by the S&P rating agency, which had sanctioned the worsening of the country's public deficits and did not believe in the promise of a restoration of accounts by the end of Emmanuel Macron's mandate in 2027.
“We thought that the end of the presidential mandate would be normal, we don't “I could not imagine such a scenario and such risk-taking,” added the head of market analysis at IG France, Alexandre Baradez, to AFP.
With the dissolution, Emmanuel Macron is making “an extremely risky bet,” believes historian Jean Garrigues. “These elections will present the French with a fait accompli: do we want a National Rally (RN) government ?”.
“It’s the legislative election which will have the heaviest consequences for France, for the French, in the history of the Fifth Republic,” said the Minister of Economy and Finance, Bruno Le Maire on RTL radio on Monday.
At the opening of the session, the flagship index of the Paris Stock Exchange, the CAC 40, fell by 2.37%. Around 12:15 p.m. local time, it was down 2.01%.
“Investors are becoming aware of the possibility of a decisive shift in France to the right,” comments Neil Wilson, analyst at Finalto. However, it is unlikely that the RN will obtain a majority in the National Assembly, according to analysts.
At the European level, investors are worried about the “weight of the France within the European Union”, explains Alexandre Baradez, with as a primary political force a party which defends in its program “a Europe of nations”.
This fear was dragging down the European currency: the euro depreciated by 0.57% against the dollar to 1.0739 dollars per euro around 12:15 p.m.
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Don't panic
Sign of a “distrust taking place towards France”, the rates at which the French State borrows on the financial markets are progressing, observes Alexandre Baradez.
This interest rate for loans maturing ten years rose to 3.19% around 12 p.m., at its highest since the end of November, compared to 3.10% at Friday's close.
The gap between this French rate and the German equivalent (judged as the safest sovereign debt in the euro zone) increased on Monday, but this difference – called “spread” – is an indicator of investor confidence.
However, “it’s not panic,” emphasizes Alexandre Baradez. The gap “increased by 6 basis points this morning” to reach “a level not seen since December-January”.
For Mr. Baradez, “the message of the RN is not the same as that of Macron” on the economic level with on the one hand “economic patriotism” and the renationalization of highways and on the other hand efforts to attract foreign investors and encourage innovation.
The shares of Vinci and Eiffage, which manage part of the French motorways via concession contracts, fell respectively by 5.28 % and 7.29% around 12:15 p.m. in reaction.
To a lesser extent, the luxury sector also suffered the blow: LVMH posted a decline of 2.24 %, Hermès by 2.59% and Kering by 1.14% on the Paris stock market, facing fears that exports would be affected by possible economic protectionism measures by the RN.
Other collateral victims, the French banks: -7.61% for Société Générale, -5.09% for BNP Paribas, -4.51% for Crédit Agricole.
David Benamou, investment director of the management company Axiom, assesses these declines to AFP as an “overreaction” of bank actions “when there is a slightly worrying event”.
Rising borrowing rates can cause an “economic risk” for banks, adds Alexandre Baradez: businesses could have difficulty repaying.