The opinion polls give Marie Le Pen's National Rally party the lead, but without securing an absolute majority
Photo: AP
A new chapter opens for the euro zone's biggest economies with intense turmoil in France and emerging political and fiscal risks fueling sharp volatility as tremors spread across over-indebted eurozone countries , such as Greece and Italy.
The premium demanded by investors to hold French government bonds over German ones soared to the highest level since the 2012 Eurozone debt crisis, underscoring market concerns about the outcome of the French election.
Opinion polls show Marie Le Pen's National Rally party in the lead, but without securing an absolute majority. However, she is widening her lead and even one poll showed that she could cross the threshold for an absolute majority. The Alliance of the Left comes in second.
The yield on the French 10-year was at 3.32%, the highest level since June 11 with the spread against the German over 85 basis points, signaling the biggest rise since 2012. The German 10-year yield reached 2.49%.
The spread of Italian 10-year bonds against German bonds also widened, reaching up to 160 basis points, in an indication that panic is spreading to the over-indebted countries of the euro. Some analysts, however, consider these moves in government bond markets too far-fetched. Pete Haynes Christiansen, strategist at Danske Bank, believes that France's structural problems will not be improved or worsened by the election result and therefore expects spreads and yields to be limited to a degree.
In the Greek government bond market, the 10-year yield reached 3.73% with the spread at 127 basis points, while the five-year borrowing cost moved to 3.17%. The volume of transactions on HDAT was limited to only 48 million euros.
The big questions
The big question is what is going to happen in the next few days. If purchases remain at current levels, this could cost France an additional 800 million euros in the first year, 4 to 5 billion euros in the fifth and 9 to 10 billion euros in the tenth, according to estimates by the French finance ministry.
An absolute majority for Marie Le Pen, which would allow her to implement more of her spending program, would push spreads even higher.
The key will be a Macron resignation. Citi estimates that Le Pen will implement even more of her program without Macron, which could push French government bond spreads to 130 to 135 basis points permanently from 100 to 105 bp if Macron stays.
Also, the French turmoil could spill over and cause more turmoil in over-indebted countries. But any impact will be more subdued than in 2017, when Le Pen pledged to take France out of the euro if she won the presidential election, as that possibility has now been withdrawn. “With no anti-European rhetoric, any spillover to the region will be limited,” said Peter Goves of MFS Investment Management.
