Barclays’ Mario Laboure is out with a long report on the implications of the French election on the country’s debt dynamics, the bond market, and the banking sector.
It takes a fairly deep look at the policy goals of challenger (and current favourite) Francois Hollande, and ultimately concludes that there really won’t be much difference between Hollande and Sarkozy, despite all the hype.
And though some may take this as good news, Barclays actually spins this negatively, implying that France has already lost its right to be called ‘core’ Europe, and that neither Hollande nor Sarkozy really have the chops to make France Germany-like, in terms of market perception of risk.
If you’re worried about the French bond market, they argue, don’t get too worked up about the election. Instead, just keep focusing on Spain and Italy, since it turns out that as the peripherals go, so goes France.
We think the primary driver of the French spreads will still be the evolution of peripheral
spreads and the macro outlook for the eurozone debt crisis. As Figure 13 (below) illustrates, the
correlation between French and Italian spreads has been very high since early 2011 and the
beta of the regression has remained very similar during both widening and tightening
scenarios (although it has been slightly lower recently). However, when we look at another
country in the core space, such as Finland, we note that 1) the beta versus Italian spreads is
much smaller (0.1 vs 0.3 in France), and 2) the beta during tightening periods falls
somewhat, as the widening is never too aggressive to start with.
On the whole, we think the elections will only be a secondary driver of French spreads,
behind the general outlook for Spain and Italy. In other words, whether the new president is
Francois Hollande or Nicolas Sarkozy, the policies post-elections are not likely to be forceful
enough to bring France back into line with the likes of Germany and Finland. If anything, the
risk is that tough decisions/actions may only come as market pressure forces the hand of
the new president. Therefore, if we see a scenario during the summer in which Italian and
Spanish spreads widen substantially, similar to last year, it is likely that France would remain
the weaker link in the core countries space, in our view, keeping a fairly high beta vs
peripheral spreads. On the other hand, if the coming months see some further peripheral
spreads consolidation (even if not as aggressive as in Q1 12), then it is also unlikely that
election results on their own would hurt French bonds much.