President Emmanuel Macron’s unexpected announcement about dissolving the Assemblée Nationale presented a financial opportunity for Matthew Russell, a bond manager at M&G, an asset management group. He took advantage and purchased French sovereign debt in the days that followed. As a London-based trader with little knowledge of French politics, he saw that French interest rates had increased by about 0.3 points to 3.3%, offering a better yield. He believed that the risk was still low, thinking that the European Union would not allow France to default, and that the European Central Bank (ECB) would intervene in case of panic.

The recent market response to financial instability in the UK caused by the Liz Truss government and tensions with the Italian government in 2018 serves as a reminder that the emergence of a Rassemblement National government or an uncertain majority is likely to result in interest rate increases.

This story underscores a fundamental truth: there are (almost) always buyers in the financial markets, but not at any price. Therefore, the prospect of a far-right Rassemblement National government or an unclear majority is unlikely to cause France to default or go bankrupt. Instead, it is likely to cost the country more. Since the dissolution, the difference between French and German rates (the “spread”) has already increased from 0.5% to 0.75%, and even reached 0.8% on Monday, July 1, after the results of the first round of the legislative elections were announced.

Photo: LensCulture