Instant View:French government loses no-confidence vote in parliament

LONDON (Reuters) - French Prime Minister Francois Bayrou lost a confidence vote on Monday, plunging the euro zone's second largest economy deeper into political crisis.

The euro showed little initial reaction, showing a 0.2% daily rise to trade at $1.1743, down from an earlier high of $1.1756, while French bond and stock futures both held onto the day's gains, up 0.3% and 0.6%, respectively.

Financial markets had anticipated the no confidence vote would fail, while French markets face another test on Friday when Fitch Ratings reviews its AA- French rating with a negative outlook.

COMMENTS:

JUAN PEREZ, DIRECTOR OF TRADING, MONEX USA, WASHINGTON:

"There was very little reaction to the French vote and the resignation of the prime minister because it was desired and expected. Truth is that guy needed to go and markets are happy that it brings potential new contention within the country for leadership. Bonds moving a little but FX-wise this had no impact since it was not a surprise."

CHRIS SCICLUNA, HEAD OF ECONOMIC RESEARCH, DAIWA CAPITAL MARKETS, LONDON:

"We've entered a period of uncertainty. The outcome was as expected, so markets should react in a modest way."

"Macron now has his work cut out, trying to find a prime minister who can get enough support to pass a budget in parliament.

"Over the near-term, I'm sure everyone in markets expects paralysis and downward pressure on ratings. The French deficit is going to remain big for the foreseeable future and how much (bond yield) spreads widen from here is open to question."

TOM ROSS, HEAD OF HIGH YIELD, JANUS HENDERSON INVESTORS, LONDON:

"This is not the last time we are going to be talking about budget deficits and fiscal spending and quite how governments deal with this."

"This is one of the most prominent areas of how this has tried to come through in terms of impacting markets. The market hasn’t taken a huge amount of note ."

"Europe had potentially this open goal, but then you have government and political situations like this that give investors pause for thought in terms of how they are going to execute on that."

SIMON EDELSTEN, FUND MANAGER AT GOSHAWK ASSET MANAGEMENT, LONDON:

"The bond markets seem to have anticipated this and longer-dated French bonds may continue at current high yields, as strong fiscal measures seem politically impossible.

However, such issues are widely spread across Europe, (with) the UK chancellor also facing problems producing a credible budget in November. All this is against a background of U.S. bond yields rising - though in a different environment of tax cuts, but a feeble-seeming economy.

The French budget situation continues to be the worst of the larger problems - but Europe has a range of social care costs, which seem destined to rise ahead of likely tax receipts. As debt service costs also are rising, the road before a crisis becomes shorter. However, politicians still see grasping this nettle as electoral suicide."

MICHAËL NIZARD, HEAD OF MULTI ASSET AND OVERLAY, EDMOND DE ROTHSCHILD ASSET MANAGEMENT, PARIS:

"Whichever outcome of the current political crisis, the probability of a significant public finances reform will remain low, so much so that financial markets themselves seem resigned and might settle for a scenario where the budget deficit does not deteriorate further.

Yet, without being catastrophic, the situation is worrisome as France diverges from the rest of the euro zone, with the largest budget deficit (-5.8% in 2024; -5.4% expected in 2025 versus a euro zone average around -3%) and public debt on an upward trajectory (113% in 2024 and 117% expected in 2025)."

(Reporting by Dhara Ranasinghe, Naomi Rovnick, and Gertrude Chavez-Dreyfuss; Editing by Amanda Cooper)