New black day on the French stock market. The CAC 40, the most important stock index in France, recorded declines this Friday that exceeded 2.5%, falls that add to those experienced throughout the week after European elections that revealed the progress of the extreme right and led the French president, Emmanuel Macron, to force an early election. As things stand, the CAC is headed for its biggest weekly drop since February 2022 – when Russia’s war with Ukraine broke out – by dropping more than 6% and with banks taking the brunt of it. In calculating the year, the index already erases the gains for the year.
To the doubts inherent to the markets with a risk premium escalating to its 2017 highs, are added the statements of the Minister of Finance, Bruno Le Maire, which has warned that France is at risk of experiencing a financial crisis similar to that experienced by the United Kingdom under the fleeting presidency of former Prime Minister Liz Truss. “Today we pay more than Portugal for our debt,” said Le Maire, who explained that “this is due to the political programs that are on the table in relation to whether we will be able to continue maintaining this debt.”
Analysts also see certain parallels between the French bond crisis and the euro zone sovereign debt crisis in 2011. Deutsche Bank experts indicate that what France pays for its debt compared to Germany is on track to register its largest weekly increase since 2011, a difficult scene that countries such as Greece, Portugal, Ireland, Spain and Cyprus experienced when it came to paying its debt and which ended in a series of bailouts.
“It is difficult to ignore the parallels between our current situation and the time of the sovereign debt crisis, as there is that familiar focus on election results, sovereign bond spreads and debt sustainability,” said Jim Reid, Deutsche Bank analyst. Added to this is that there are no obvious signs about where things are headed next.
Barclays, which for months had been recommending its clients hold a good amount of European stocks and fewer US stocks, now advises “caution in the region for now given the political situation in France.” Concerns about French markets “range from economic stagnation, possible rating downgrades to growing rumors of a breakup in the euro zone,” Mohit Kumar, chief European economist at Jefferies, told the FT.
Be that as it may, the political crisis threatens to take its toll on the economy. In less than a week, the markets have gone from fearing an advance by the extreme right to also becoming nervous about a potential emergence from the left. Late this Thursday, the left-wing parties announced an agreement to create the new Popular Front in view of the elections that will be held on June 30 and July 7.
“Their program is completely crazy,” said Le Maire. “It will guarantee a downgrade of the debt rating, massive unemployment and an exit from the European Union,” he predicted.
An alliance that Minister Le Maire does not like either after ensuring that his victory would lead to the country’s departure from the European Union. In his opinion, the program of the Popular Front, made up of four left-wing parties, would cause an “economic collapse.” “Their program is completely crazy,” said Le Maire. “It will guarantee a downgrade of the debt rating, massive unemployment and an exit from the European Union,” he predicted.
According to a draft seen by Bloomberg, which could still be amended, this alliance would reject the “austerity restrictions” of the EU fiscal pact governing debt and deficits. Domestic economic policies would include increasing paid annual leave from five to six weeks, reinstating a wealth tax abolished by Macron and abolishing his pension reform to restore the right to retire at age 60. For the financial industry, the draft talks about taxes on financial transactions, as well as the obligation for banks to increase reserves to face climate risks.
Conservative Republicans are also finalizing an alliance with Marine Le Pen’s far-right National Rally party ahead of the election. To compound the general disorder, the French union CGT has called strikes across the country on Saturday to warn against France falling into “fascism.”
Doubts have appeared outside France, although to a lesser extent. The euro falls against the dollar to April lows, while the European Stoxx 600 index is on track for its worst week since October last year. The stock indices of Spain, Germany, Italy and Spain also record weekly losses. On the other hand, on Wall Street, the stock markets will end the week with gains.
