Yields on French government bonds continue to rise and the Paris stock exchange is falling due to concerns about the outcome of the French re-election, which begins in just over two weeks.
The euro is also continuing to fall against the dollar.
A re-election is a high-risk strategy and it is in times of already heightened geopolitical risk, says Kaspar Hense, senior portfolio manager at asset manager RBC Bluebay Asset Management.
The French 10-year yield rose by over 10 basis points on Tuesday, having also risen on Monday. This has increased the gap to corresponding German yields to the highest level since the start of the pandemic in 2020 – a clear signal of increased mistrust of the French state as a borrower.
Hard to get order
President Emmanuel Macron – who surprised many by dissolving the French parliament after a major setback in the EU election at the weekend – has told French media that he intends to remain as president.
If the next parliament is dominated by his political opponents – which opinion polls published on Monday suggest may be the outcome of the re-election – it will be difficult to get the already heavily strained public finances in the eurozone's second-largest economy back on track.
Many also see a risk that the re-election will result in a deadlock between the different factions in French politics.
Downgraded credit rating
Credit rating agency S&P Global Ratings downgraded France's credit rating as recently as May, citing gloomy prospects for the country's budget deficit in the foreseeable future. And many analysts fear that the far-right party National Rally (RN) will, after an electoral success and with its own prime minister, adopt a typically populist line on public finances.
That is, try to stimulate their way out of the problem, says Chris Turner, global markets chief at major bank ING.
On the Paris stock exchange – which has fallen to its lowest level since February after the weekend – shares in French major banks, such as BNP Paribas and Société Générale, are being particularly hard hit.
