By Yoruk Bahceli and Samuel Indyk
A stunning election victory for France's leftist alliance has left investors on edge, as concerns grow over potential policy paralysis and its impact on the country's struggling public finances.
The left-wing New Popular Front (NFP) alliance emerged as the largest party in Sunday's election, but fell short of an absolute majority, defying expectations that the far-right National Rally (RN) would come out on top.
With France facing a hung parliament and complex negotiations to form a government, the risk premium for holding French debt over Germany's remains a point of concern for markets.
Debt levels in France are already high, standing at 110.6% of output in 2023, raising fears that any fiscal loosening to reach a compromise in the new assembly could further strain public finances.
Market reactions have been mixed, with France's main stock index fluctuating and shares in major banks like BNP Paribas, Societe Generale, and Credit Agricole experiencing volatility amid political uncertainty.
While a hung parliament may limit the left's spending plans and avert a budget crisis, concerns linger over the NFP's intentions to scrap key reforms and increase taxes without addressing the deficit.
Analysts warn that France's credit rating could come under pressure if growth falters or deficits persist, with the French/German bond spread likely to remain wider than pre-election levels.
Investors are cautious about French assets, as the formation of a new government and ongoing negotiations with the European Commission could prolong uncertainty and impact borrowing costs.
Overall, the election outcome has left the financial markets on edge, with the potential for continued volatility and challenges ahead for France's economic stability.
Analysis:
The recent election results in France have created uncertainty in the financial markets, as investors grapple with the implications of a leftist alliance winning power. The risk of policy paralysis and concerns over public finances have led to fluctuations in stock prices and bond spreads, highlighting the fragile nature of France's economic situation. As the country navigates the aftermath of the election, investors will be watching closely for signs of stability and responsible fiscal management to ensure long-term growth and stability.