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The French stock market deepened losses on Wednesday amid ongoing political turmoil, with the CAC 40 index sliding 1.3% at a point to the lowest since 6 August. The benchmark recovered some losses and ended 0.72% lower but remains at a near 4 four-month low level. On Thursday, the index opened in the green, up 0.56% at 7.180,19.

French Prime Minister Michel Barnier faces the challenge of being ousted by the opposition parties if he uses constitutional tools to push through his budget plan. Both left-wing parties and the far-right National Rally hold the power to put forward a no-confidence motion and take down the French government.

French markets underperform global peers

The French stock market has been under pressure amid months-long political unrest. The CAC 40 is a rare underperformer with a negative performance this year, while global benchmarks all present a strong rally. Year-to-date, the index is down 5.3%, compared to a 5.6% rally of the euro Stoxx 600 and a 15% growth in the DAX. Globally, Wall Street repeatedly reached new highs, with the S&P 500 recording a nearly 26% surge and China’s Hang Seng Index climbing 13% this year.

French banking stocks were hit the most due to uncertainties around the country’s public finance. On Wednesday, shares of BNP Paribas SA slumped as much as 3% to a fresh six-month low. France’s biggest bank’s stock is down more than 11% year to date, in contrast to an 18% rally of the Euro Stoxx 600 banking index. The insurance company, AXA’s shares tumbled 4.3%, and Credit Agricole slid 1.3% on the same day.

France’s political turmoil

In June, former Prime Minister Macron Emmanuel called for a snap election, resulting in a minority government after naming Michel Barnier as the new leader. The conservative veteran unveiled his budget plan, aiming to bring down the government debt level through extensive spending cuts and tax hikes. However, the bill has faced staunch opposition from left-wing alliances and the populist far-right National Rally leader, Marine Le Pen.

This political gridlock raises concerns about a potential Greece-style crisis, as France’s deficit is projected to reach 6.1% of its gross domestic product (GDP) this year -more than double the limit required by the European Union. According to European Commission projections, France’s debt-to-GDP ratio is expected to reach 112.4% in 2024, the second highest in the EU. The government’s plan to reduce this ratio by 5.1% next year is widely seen as unachievable. In May, S&P Global Ratings downgraded France’s credit score from AA to AA-, forecasting a deficit level of 3% of GDP until 2027.

Concerns over France’s political and financial stability have pushed the spread between German and French government bond yields – a key measure of market risk sentiment -to 86 basis points, the highest level since July 2012.

Euro may face further pressure

France’s political uncertainty, alongside Germany’s auto industry crisis and Trump’s tariff threat, added to the eurozone’s gloomy economic outlook. This will likely lead to a further depreciation in the euro against other currencies in the G-10 group, particularly the US dollar. The EUR/USD slid slightly overnight to mid-1.05 at 5:50 am CET today, remaining at a one-year low.