By Alun John, Dhara Ranasinghe and Stefano Rebaudo
LONDON (Reuters) – France’s financial markets are on a rollercoaster ride as the country grapples with one of its worst political crises in decades, and although confidence is improving, the bumpy ride is not over.
French Prime Minister Sebastien Lecornu has vowed to suspend a historic pension reform until after the 2027 election, sacrificing one of President Emmanuel Macron’s achievements to ensure the government’s survival.
Here’s a look at where the markets stand and what’s coming next.
HIDDEN BOND WATCHERS?
The gap between French and German 10-year bond yields, the premium investors demand to lend to France, is around 78 basis points, down from nearly 90 basis points last week.
It could tighten towards 75 basis points, said Citi senior rates strategist Aman Bansal.
It narrowed as investors focused on political stability over long-term fiscal concerns. Lecornu’s plan to suspend pension reform means he will likely remain in office, avoiding early elections, even if some parties have called a no-confidence vote for Thursday.
RBC BlueBay Asset Management senior portfolio manager Kaspar Hense said the firm had closed its short position – a bet on falling prices – in French bonds last week on expectations that a political compromise would be found.
“Demand for OAT (French bonds) remains strong at these real and nominal yield levels,” said Reinout De Bock, head of European rates strategy at UBS.
SEE RATINGS
French borrowing costs remain among the highest in the euro zone, and as the suspension of key pension reforms keeps pressure on public finances, France is vulnerable to further downgrades.
Lecornu says suspension would cost €400 million ($463 million) in 2026 and €1.8 billion in 2027. Without compensatory measures, France’s debt-to-GDP ratio would fail to stabilize, analysts say.
Goldman Sachs estimates that permanently suspending pension reform would add 0.5% of GDP to the deficit by 2035, so debt as a percentage of GDP over the next decade stabilizes at around 130%, compared to 113% today.
Moody’s, which rates France at Aa3 with a stable outlook, reviews France on October 24.
“We expect some downward pressure, but the markets are already factoring it in,” said BlueBay’s Hense.
STOCKS SOAR
France’s blue-chip stock index rose 2.6% on Wednesday, its best day since April’s tariff recovery, but that has little to do with politics: luxury giant LVMH rose 14% after the results.
French mid-caps are up around 1% but have underperformed over the long term, up almost 10% over the past two years, compared with 15% for the blue-chip index and 26% for the broader European benchmark.