French Markets Tumble After PM Lecornu Resigns

French Markets Plunge Following Prime Minister Lecornu's Resignation

Impact of Lecornu's Resignation on French Markets

LONDON (Reuters) -A selloff in French markets gathered pace on Monday after French media reports that Prime Minister Sebastien Lecornu has resigned.

Market Reactions and Investor Sentiment

French stocks fell sharply, government bond yields were up 8 basis points and the euro was last down 0.65% at $1.1667. The premium investors demand to hold French government debt, rather than benchmark German bonds, hit its widest since January.

Economic Implications for France

COMMENTS:

Potential Political Outcomes

CARLO FRANCHINI, HEAD OF INSTITUTIONAL CLIENTS, BANCA IFIGEST, MILAN:

"French banks are getting hammered today and the spread against Bunds is widening sharply. The situation in France is increasingly complicated - politically and economically. I don't think Macron will resign. That would likely make things worse, especially with the populist wave sweeping across Europe and the risk of far-right gains. Volatility is likely to persist, but so far, markets seem to be absorbing the shock. There's no major spillover yet, though French banks are clearly bearing the brunt."

PHILIP SHAW, CHIEF ECONOMIST, INVESTEC, LONDON:

"French bond spreads have widened out, which is not surprising, but the move looks contained. You could argue Lecornu's task was impossible and the measures he was proposing.

"The impasse is likely to going to continue. There is already a certain degree of uncertainty price in. One question is does this mean we are heading to fresh elections but at this point it hard to tell what (French President Emmanuel) Macron will do.

"We have been here before, but elections did not solve (it)."

CHRIS BEAUCHAMP, CHIEF MARKET ANALYST, IG GROUP, LONDON:

"It's just one government after another and we're looking at the run of finance ministers ... this is the major problem for French assets but it has spillover effects for the rest of Europe.

"It certainly makes people wary about European assets at this point because of the uncertainty and the spillover effects that go from France just being unable to find its way out of this malaise."

STEPHANE EKOLO, GLOBAL EQUITY STRATEGITST, TRADITION, LONDON:

"This unprecedented move — the first time under the Fifth Republic that a prime minister has stepped down before addressing Parliament — pushes France into uncharted political territory. Given the impasse, the likelihood of a parliamentary dissolution and snap elections has risen materially. Alongside this political uncertainty/crisis, one can expect an economic one (sentiment is likely to deteriorate) given the uncertainty surrounding the wide budget deficit.

"Is France heading toward the appointment of a technical government, the nomination of yet another prime minister, or even a snap election? Alternatively, could the country face a prolonged political vacuum similar to Belgium’s 18-month government hiatus?

"What seems clear for now is that France will be unable to present a budget before year-end, underscoring the depth of the current political paralysis. Banks & financials overall are likely in this uncertainty to be under pressure."

MICHAEL BROWN, SENIOR RESEARCH STRATEGIST, PEPPERSTONE, LONDON:

"The market reaction is exactly as you would expect, the euro is lower, (French) OAT-Bund spread wider, French equities lower -- that’s all very predictable. The bigger concern for the market is really what comes next, because if Macron decides to appoint another prime minister that’s going to be the sixth PM in two years, who will again face the exact same challenging parliamentary arithmetic, the exact same problems when trying to pass the budget, so that feels a little like a non-starter.

"The thing that is really playing on market participant’s minds is not really the fact that the PM has quit - which has clearly come as a bit of surprise, though his future was looking ropey this week anyway, I think the bigger question how does this all resolve itself? Because there doesn’t seem to be an obvious solution, or obvious silver bullet that we can look to, to resolve it overnight."

LEE HARDMAN, SENIOR CURRENCY ANALYST, MUFG, LONDON:

"The fall in the euro shows markets are becoming more uneasy about the political uncertainty in France. The pressure now goes back to President Macron to see how he deals with this deadlock.

For the market, the worst case would be if he tries to break that deadlock by calling snap parliamentary elections, that would extend the uncertainty in the near term and likely trigger another leg lower for the euro.

The risk of that has increased after Lecornu's resignation."

KIRSTINE KUNDBY-NIELSEN, ANALYST, DANSKE BANK, COPENHAGEN:

“It’s concerning that the new cabinet only lasted 12 hours. There seems to be no willingness in parliament for a budget to be passed, so I think yields higher, pressure on euro-dollar in the near term.

“There doesn’t seem to be a willingness to get lower government deficits and consolidate French public finances and investors want a premium for that.”

KIT JUCKES, CHIEF FX STRATEGIST, SOCIETE GENERALE, LONDON:

"This is ongoing issue - France - as far as the euro is concerned. France can have some impact on the euro, but the overall impact is much less than it was."

(Reporting by the Reuters Markets Team; Compiled by Dhara Ranasinghe; Editing by Amanda Cooper and Vidya Ranganathan)