France's stock market is heading for its biggest weekly drop in more than two years, amid fears that the country's far-right party could win the upcoming parliamentary elections.
French bonds were also hit this week, as analysts warned of the risk of a Liz Truss-style market panic following Emmanuel Macron's shock decision last Sunday to call early elections to the national assembly.
The CAC 40 index of the 40 largest stocks listed in Paris has had its worst week since March 2022. It fell 2.7% on Friday, bringing its weekly losses to more than 6%.
Friday's sell-off came after French Finance Minister Bruno Le Maire warned that the country could risk a financial crisis if either the far right or left won the next election. parliamentary electionbecause of his strong spending promises.
"When I look at the far right, I see a program made of lies," Le Maire told Franceinfo radio.
The far-right National Rally party, led by Marina Le Penhas previously called for protectionist economic policies and proposed higher public spending as well as lower VAT on fuel, electricity and gas.
Le Maire also stated that a new alliance of leftist parties would cause an โeconomic collapseโ if he came to power.
France aims to reduce its budget deficit to 3% by 2027, to meet the maximum borrowing allowed under eurozone rules. Higher government spending or tax cuts could undermine that momentum.
When asked if the current political instability could lead to a financial crisis, Le Maire said "yes."
"This is due to the political programs that are on the table regarding the question of whether we will be able, yes or no, to continue financing this debt," he added.
The gap between French and German borrowing costs has widened to a seven-year high this week, as investors sold French bonds, driving down prices, which pushed up the yield, or interest rate. , Of the debt.
This spread measures the premium investors demand for lending to Paris, rather than the traditional safe haven of Berlin. The last time this gap was larger was in 2017, shortly before Macron defeated Le Pen in that year's presidential election.
TO poll this week showed the National Rally was on track to win the snap election and claim a third of the vote, ahead of France's left-wing bloc, which is projected to get 22%, and Macron's centrists with 19% of the vote. .
Big losses for centrist candidates would almost certainly mean the end of Macron's pro-growth reforms, warned Holger Schmieding, chief economist at Berenberg bank. A hung parliament could lead to deadlock, he said.
โHowever, if Le Pen calls the shots in parliament and pursues major parts of her expensive 'France First' fiscal and protectionist agenda, the result could be a Liz Truss-style financial crisis. At the moment we consider it a serious risk, not a forecast,โ Schmieding added.
If the National Rally gained power in the French National Assembly, France would be in a โcohabitationโ scenario; Macron would remain president and National Rally's Jordan Bardella would likely become prime minister.
