(Bloomberg) -- French markets steadied ahead of a no-confidence vote that could bring down Prime Minister Michel Barnier’s administration and extend the political turmoil that has weighed on the nation’s assets.
The risk premium on 10-year bonds tightened slightly to 84 basis points, while the country’s benchmark stock index posted mild gains. A debate on a motion to topple the government after it pushed through an unpopular budget is due to begin at 4 p.m. Paris time, with voting to follow.
Subscribe to the Bloomberg Daybreak podcast on Apple, Spotify or anywhere you listen.
France’s borrowing costs last week surged to the highest level since 2012 compared to Germany’s amid a standoff over how the government plans to slash its ballooning deficit. Marine Le Pen’s far-right party, which opposes Barnier’s budget, is now supporting a no-confidence vote after its demands weren’t fully met.
“Our base case expectation is that the government will lose the vote,” Rabobank strategists including Richard McGuire wrote in a client note. They say French bonds can weaken further and recommend selling the debt against buying Spanish and Italian peers.
Some investors have forecast that France’s bond premium could hit 100 basis points if the government falls, with Barnier warning of a “storm” in financial markets if he is dismissed from power. President Emmanuel Macron called on French lawmakers to set aside their personal ambition and reject the vote.
Yet the motion is expected to pass if supported by both Le Pen’s National Rally party and a left-wing coalition. A government collapse so close to the end of the year would take France into unchartered territory, with the economic and financial impact hard to predict.
“Until we get through this period, which could go into the beginning of next year, the markets are going to remain very skittish,” said Guy Miller, chief market strategist at Zurich Insurance Co. “The risk is that spreads go higher rather than lower.”
--With assistance from Sujata Rao.
(Updates prices throughout.)
©2024 Bloomberg L.P.