French markets fall on resignation of prime minister Sebastien Lecornu

French outgoing Prime Minister Sebastien Lecornu, who resigned just a day after naming his government, delivers his statement at the Hotel Matignon in Paris on Monday. Picture: Stephane Mahe/Pool via AP 

French markets tumbled after the resignation of prime minister Sebastien Lecornu on Monday 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.

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 Emmanuel Macron, which would cause the crisis to intensify significantly.” 

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 Mr 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. Mr 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.” 

Bloomberg