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French Assets Tumble, Euro Sinks as Prime Minister Lecornu Quits

(Bloomberg) -- French markets tumbled after the sudden resignation of Prime Minister Sebastien Lecornu, with investors speculating that fresh elections are inevitable to solve the political crisis.

French bonds fell, with 10-year yields jumping as much as 11 basis points to 3.61%. The premium that investors are demanding to hold French debt over Germany is now the highest level this year. The CAC 40 Index sank 2%, with banks taking the biggest hit. The euro weakened 0.7% against the dollar.

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The resignation is the latest step in a long-running political crisis in France, which has prompted the downfall of a number of prime ministers and roiled the nation’s assets. The key problem successive premiers have faced is having to pass a budget through a fractured parliament that includes unpopular spending cuts and tax increases to rein in the largest deficit in the euro area.

The resignation “plunges France towards the unknown,” said Luigi Buttiglione, founder of advisory firm LB Macro. “The French economy is poised to suffer from the unavoidable further loss of confidence by the business sector, thus impacting activity in the whole EU give the weight of France.”

The resignation came after President Emmanuel Macron named a broadly unchanged cabinet Sunday, which sparked an immediate backlash from opposition parties as well as his own supporters.

The country’s credit rating has twice been downgraded since Lecornu took office. Moody’s holds an Aa3 rating on France with a stable outlook, and is scheduled to next update on Oct. 24. S&P has an AA- assessment with a negative outlook ahead of its next review on Nov. 28.

What Bloomberg Strategists say...

“French government bonds will likely fall further from here as another prime minister succumbs to the lack of political will to tackle the deficit, raising the likelihood of another election to break the political deadlock.

—Conor Cooper, Macro Squawk. Click here to read the full analysis

A Barclays Plc basket tracking stocks that generate more than 30% of their revenue in France dropped 3.8%. French banks Societe Generale SA, Credit Agricole SA and BNP Paribas SA fell more than 5%.

“I am struggling to see how France avoids an election with this parliament lacking a mandate,” said Jordan Rochester, head of macro strategy for EMEA at Mizuho.

(Updates throughout)