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French Markets Sink Amid Growing Fears of Political Paralysis.
stock :: 2025-10-06 :: source - bloomberg
By Julien Ponthus, James Hirai and Claudia Cohen
(Bloomberg) -- French markets tumbled after the resignation of Prime Minister Sebastien Lecornu threw the country into another political crisis, raising the prospect of snap elections to break the deadlock.
French bonds fell, with 10-year yields jumping as much as 11 basis points to 3.61%. That left the premium that investors are demanding to hold French debt over Germany at the highest level this year. The CAC 40 Index lost 1.5% as banks took the biggest hit. The euro weakened 0.7% against the dollar.
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The resignation is the latest step in a long-running political crisis in France, which has prompted the downfall of a number of prime ministers and roiled the nation’s assets. The key problem successive premiers have faced is having to pass a budget through a fractured parliament that includes unpopular spending cuts and tax increases to rein in the largest deficit in the euro area.
“To lose one prime minister is unfortunate, but four looks like a major crisis,” wrote Chris Beauchamp, chief market analyst at IG Group. “The real worry will be that the procession of prime ministers unable to govern will at some point force the resignation of President Macron, which would cause the crisis to intensify significantly.”
France’s Lecornu Set to Speak After Resigning as PM: TOPLive
French bonds were once viewed as a haven investment of a similar order to Triple-A rated German notes. Now, 10-year yields are among the highest in the euro area. Fitch Ratings cut its credit assessment to A+ from AA- just days after Lecornu took office, moving France a notch lower than the UK, to the same level as Belgium.
Some analysts cautioned against making any political speculation based on market swings. Macron still has options ahead of him. He can name a new prime minister, who would then need to propose a fresh cabinet or he could call a parliamentary election. Another potential scenario is that he resigns himself — something he’s previously said he won’t do.
For investors, the key metric to watch has become the French-German bond spread — a measure of risk between what’s perceived as Europe’s safest country and one of its riskiest. The gap is likely to keep widening to 100 basis points, said Nicolas Forest, chief investment officer at Candriam.
“There’s no panic in the market, but clearly some investors are selling,” he said. “The probability of a dissolution of the National Assembly is more likely.”
What Bloomberg Strategists say...
“French government bonds will likely fall further from here as another prime minister succumbs to the lack of political will to tackle the deficit, raising the likelihood of another election to break the political deadlock.
—Conor Cooper, Macro Squawk. Click here to read the full analysis
French banks bore the brunt of the equity selloff. European banks are particularly vulnerable to swings in French debt.
Their exposure to French sovereign bonds was around €500 billion ($583 billion) a year ago, according to data from the EBA’s 2024 EU-wide transparency exercise published last November, cited by Bloomberg Intelligence. This represented 23% of total sovereign bonds held by EU banks, more than any other country in the region.
Societe Generale SA, Credit Agricole SA and BNP Paribas SA fell more than 5%. A Barclays Plc basket tracking stocks that generate more than 30% of their revenue in France dropped 3.8%. Even so, the balance sheets of the country’s banks are still strong, said Rafael Quina, senior director of financial institutions at Fitch Ratings.
“It’s a clear knee-jerk market move,” said Karen Georges, a fund manager at Ecofi. “I’m not that concerned for my portfolio of French stocks as their business outside of France will compensate if activity slows domestically.”
About 80% of the CAC 40’s sales are generated overseas, according to data from Citigroup Inc., implying a low earnings risk to companies such as LVMH, Sanofi SA and TotalEnergies SE.
Still, Paris-listed stocks have lagged the rest of Europe. The benchmark CAC 40 is up just 7.6% this year, compared with a 12% rally in the broader Stoxx 600 Index.
“It’s not clear if it will get much worse. It depends of upcoming political discussions,” said Christophe Boucher, chief investment officer at ABN Amro Investment Solutions in Paris. “But today, of course, it’s a surprise and a shock.”
--With assistance from Michael Msika.
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