Investors panic as France's government faces collapse

In France, the political instability surrounding the government of Michel Barnier has caused significant turmoil in the financial markets. On November 27, 2024, shares in major banks took a downturn, leading to a 1.4% drop in the CAC 40 index. This reaction is largely driven by investor fears about the possibility of a government collapse, which could result in the nation being without a functioning government or an approved budget. Economist Bruno Cavalier from Oddo BHF pointed out that the situation has created an unprecedented 'risk premium' for lending to France. As of mid-November, banks were demanding higher interest rates to lend to the French government, with rates climbing to 3.04% compared to Germany's 2.16%. Such a disparity, the widest in over a decade, indicates a growing lack of confidence in the French government's financial stability. The potential for a no-confidence vote against Barnier’s government, backed by leftist parties and the far-right Rassemblement National, poses further threats to both the government and its ability to produce a budget for the coming year. The echo of these political events has sent shivers through the financial community, leading to a cautious atmosphere as stakeholders seek to reassess their investments and exposure to the perceived instability that may stir from a change in government. With the dissolution of the Assemblée Nationale earlier this year, market reactions reflect heightened anxiety over the risk of a political vacuum, marking this as a crucial time in France's economic trajectory.