The French stock market deepened its losses on Wednesday amid ongoing political turmoil in the country. The CAC 40 index fell by 1.3%, reaching its lowest point since August 6. The benchmark recovered some losses and ended the trading session down 0.72%, but remains close to a four-month low. On Thursday, the index opened positively, rising by 0.56% to 7,180.19.
The market's pessimism was fueled by political instability. French Prime Minister Michel Barnier may face the threat of being ousted by opposition parties if he utilizes constitutional tools to advance his budget plan. Both the left-wing parties and the far-right "National Rally" have the right to propose a vote of no confidence and displace the government.
RelatedFrench markets lag behind global ones
The French stock market has been under pressure for several months due to ongoing political events. The CAC 40 index is a rare underperformer, showing negative results this year, while global benchmarks are experiencing steady growth. Since the beginning of the year, the Paris index has decreased by 5.3%, while the European Stoxx 600 has risen by 5.6%, and the German DAX has increased by 15%. The global disparity is even more striking: Wall Street has repeatedly reached new highs, with the S&P 500 rising nearly 26%, and the Chinese Hang Seng climbing 13% this year.
Shares of French banks have suffered the most due to the uncertainty surrounding the country's public finances. On Wednesday, BNP Paribas SA's stock fell by 3% to a new six-month low, with shares of France's largest bank down more than 11% year-to-date. AXA's shares dropped by 4.3% on the same day, while Credit Agricole's fell by 1.3%.
RelatedPolitical upheaval in France
In June, President Emmanuel Macron announced extraordinary parliamentary elections, resulting in the formation of a minority government. After lengthy negotiations, Michel Barnier was appointed to lead it. The conservative veteran of French politics presented his budget plan aimed at reducing public debt through significant spending cuts and tax increases. However, the bill faced strong opposition from left-wing coalitions and the populist far-right "National Rally" led by Marine Le Pen.
This political deadlock raises concerns about a potential repeat of a financial crisis reminiscent of Greece, as France's budget deficit is projected to reach 6.1% of GDP this year—more than double the limit set by the European Union. According to the European Commission's forecasts, France's debt-to-GDP ratio will reach 112.4% in 2024, the second-highest in the EU. Many consider the government's plan to reduce it by 5.1% next year to be unachievable.
In May, S&P Global Ratings downgraded France's credit rating from AA to AA-, forecasting a deficit of 3% of GDP until 2027.
Concerns over France's political and financial stability have led to the spread between German and French government bond yields—a key market sentiment indicator—reaching 86 basis points, the highest level since July 2012.
The euro may face further pressure
Political uncertainty in France, along with the automotive industry crisis in Germany and the tariff threat from Trump, have worsened the bleak economic outlook for the eurozone. This is likely to lead to further declines in the euro against other G-10 currencies, particularly the US dollar. Currently, the EUR/USD pair is trading at 1.05 dollars per euro, remaining at an annual low.