The surprise resignation of Prime Minister Sébastien Lecornu plunges France back into great vagueness… and revives investor concerns regarding the country’s political and budgetary situation, with a weight of the Paris Stock Exchange and in relation to the cost of debt.
The Paris Stock Exchange ended up 1.36% on Monday, October 6, and France’s ten-year interest rate rose to 3.61% just after the waiver, before returning at the end of the day to 3.57%. The euro also weakened against the dollar. Between the political deadlock, budget uncertainties and market volatility, sources of concern for investors are multiplying.
The threat of dissolution
First there is “the probability that there will be a dissolution” of the National Assembly, Philippe Cohen, portfolio manager at Kiplink, tells AFP. Emmanuel Macron also said he was ready on Monday to “take responsibility” in the event of a new failure by the resigned Prime Minister Sébastien Lecornu, whom he gave 48 hours to test the latest negotiations.
The absence of budget
“We have an unknown on how the 2026 budget will be financed and the markets do not like unknowns,” said Philippe Cohen.
The resignation of Sébastien Lecornu actually compromises the presentation of a budget before October 13, making the vote on a special law more likely than the state will at least operate.
In the debt market, the French ten-year loan rate surpassed 3.61% on Monday just after the waiver announcement, hitting its highest level since March. It then returned at the end of the day to 3.57%.
The “spread”, or the gap between the French and German 10-year borrowing rates, the benchmark in markets, now reaches 0.85 percentage points, for the first time since January.
Before the dissolution of the National Assembly by President Emmanuel Macron in June 2024, this gap was around 0.50 percentage points.
A political crisis that lasts
Sébastien Lecornu’s resignation highly highlights “the precarious nature of the French political system,” notes Danni Hewson, head of financial analysis at AJ Bell in a note.
In 2024, the dissolution of the National Assembly had cut the grass from under the foot of the CAC 40, which showed 6% growth over the year leading up to the June announcement… to ultimately support 2.15% over the year.
Since then, the Star index “returned to an all-time high” and “started to catch up,” Cohen said. Now, since the beginning of the year, CAC 40 has risen by about 8%, against almost 16% for the FTSE 100 in London and 22% for the DAX in Frankfurt.
A safety net
However, observers are at little risk of contagion from a Franco-French situation. “The French market is subject to the pangs of its internal politics,” summarizes Philippe Cohen.
“The sharp fall in French banking shares, the fall in the euro and the rise in ‘Sprates’ underline the weight of the prolonged paralysis” of the political situation. But “the increase in ‘spread’ is not, at this stage, sufficient to trigger the ECB’s PPI instrument,” the European Central Bank, Evercore ISII analysts say.
In case of tensions in the debt market, the ECB has in its arsenal a “transmission protection instrument” (ITP), which allows it to buy state debt securities, the yields of which are rising too quickly compared to those of Germany.
“The existence of this safety net continues to help contain” the rise in French debt yields, analysts continue.
Source: BFM TV
