Investing.com - The announcement on Sunday by French President Emmanuel Macron of the dissolution of the National Assembly, following his party's poor performance in the European elections, sent shockwaves through the Paris Stock Exchange on Monday, with the CAC 40 showing a significant decline.
Indeed, the prospect of new legislative elections, which are expected to take place on June 30, significantly increases uncertainty regarding politics, public finances, and economic policy, as highlighted by analysts at Bank of America (NYSE:BAC) in a note published this Monday morning, reminding that uncertainty is not a good ingredient for growth and investor sentiment.
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The analysts also pointed out that it is difficult at this stage to predict the outcome of the French legislative elections, specifying that the scenario with the most ramifications for the political and economic agenda (and therefore increasing uncertainty the most) would undoubtedly be a majority by the right-wing populist party, National Rally.
Regarding public finances, BofA reminded that the 2024 budget of France, voted in last December, projected a deficit of 5.1% of GDP for 2024 and 4.1% for 2025, and emphasized that a new government majority could want to revisit the budget and challenge these objectives, potentially leading to an excessive debt procedure by the EU.
In this context, the bank's analysts expect the interest rate spread between German and French bonds to widen in the coming months, noting that French bonds were already under pressure following recent downgrades of France's debt rating by rating agencies.