French borrowing costs surge as political crisis deepens
French assets suffered at the hands of a brutal sell-off on Monday, after the country’s latest prime minister resigned just a month into the role, exacerbating an already grave political crisis.
French stocks tumbled across the board while government borrowing costs climbed sharply to their highest since 2011, after newly appointed prime minister Sebastien Lecornu quit less than a day after President Emmanuel Macron named his new cabinet.
The fresh round of political chaos – which will extend a political impasse that began at the parliamentary elections in June 2024 – carried the yield on government bonds up by as much as 10 basis points on Monday to reach 3.6 per cent for the first time in 14 years. Meanwhile the spread between French bonds and their German equivalent – a key indicator of investor sentiment – shot past 89 basis points, its highest since late 2024.
Shockwaves spread to markets
The tremors extended into France’s equity markets and even the euro. The country’s blue-chip Cac 40 index fell by some two per cent in early trades, while the Cac Next 20 – which hosts the next 20 largest public companies – collapsed by nearly three per cent, before both pared back some of their earlier losses. Banks and luxury giants Hermes and LVMH led the trail of losses.
The euro – which thanks to its position as a single currency often insulated from individual countries’ political fluctuations – was trading down 0.6 per cent on the dollar to $1.16, and 0.3 per cent against the pound at 86.8p.
Lecornu’s abrupt resignation has deepened a long-running political crisis in France that leaves Macron facing the prospect of having to appoint his seventh prime minister since the start of last year. The President’s minority government has been unable to build a consensus among French lawmakers for a round of fiscal tightening to curb the country’s runaway budget deficit that reached 5.8 per cent in 2024.
“While the political situation may not directly impact… companies, the fact that France’s largest and most prestigious companies are getting sold off today is a sign that investors are offloading French assets on a broad basis, and the risk is that this causes contagion elsewhere,” said Kathleen Brooks, research director at XTB.
“At the back of everyone’s mind, is whether this latest political stumbling block in France is a step closer to National Rally, the far-right party, to take power. Pricing in the risk of this happening is tricky and could cause volatility down the line.”
French borrowing costs higher than in Greece and Italy
The protracted political and economic crisis has seen France’s borrowing costs climb above those of Italy and Greece, which both had bailed out by the ECB during the 2012 Eurozone crisis.
Lecornu was only appointed last month, after his predecessor Francois Bayrou lost a vote of no confidence having failed to corral enough parliamentary support for his austerity-lite budget. And the Prime Minister quit less than 24 hours on from Macron unveiling a new cabinet that kept in place many of the senior faces who had failed to prop up the government’s previous failed administrations.
“This morning’s surprise resignation of French PM Lecornu deepens France’s political and economic malaise,” said Alex Everett, senior investment manager at Aberdeen. “Opposition parties have yet more evidence that Macron-friendly groups cannot lead parliament, and calls for new elections will grow.
“New elections would reduce President Macron’s control further still, so appointing another PM is perhaps his preferred choice. However, vocal dissent from nearly all parties – including the hitherto more supportive Republican and Socialist parties – makes it clear that there is very little appetite for consensus building.”