After France’s Prime Minister François Bayrou lost a confidence vote on 8 September, leaving President Emmanuel Macron with few options, wealth managers discuss the impact on asset allocation and the next steps.

French President Emmanuel Macron is expected to name a new Prime Minister in a matter of days, after the country’s Prime Minister François Bayrou lost a confidence vote.

His defeat in National Assembly – by 364 votes to 194 – was expected but France’s debt remains. France is now expected to name its fifth Prime Minister in less than two years. Since 1945, France has had 26 prime ministers as of the time of writing. The UK, by contrast, has had 16.

French political turmoil is becoming rather "Italian." Media reports said French 10-year bond yields had edged ahead of those of Italy – in other words, were priced as being riskier. Today, however, Refinitiv data shows the 10-year yield of Italy at 3.51 per cent, just ahead of France’s at 3.49 per cent. (Bloomberg actually had France higher, but that’s due to a change in the benchmark bond used for the calculations, according to marketwatch.com)

Here are some reactions from wealth managers to the vote.

Samy Chaar, chief economist at Lombard Odier
“We expect President Macron to appoint a new premier and administration after French Prime Minister François Bayrou lost a confidence vote. Fresh elections look a less probable scenario. We believe the cost of French debt will remain elevated in either case amid a fragmented parliament and ongoing policy-making difficulties. We do not expect a political crisis to morph into a financial one: France’s current account is broadly balanced, President Macron ensures a degree of political continuity, and the European Central Bank an effective financial backstop. We lowered government bond exposures to underweight in August, preferring investment grade corporate and emerging market hard currency bonds.”

Chris Beauchamp, chief market analyst at IG
"Markets saw this result coming two weeks ago, hours after the ill-fated Monsieur Bayrou announced it. The lack of reaction suggests that investors expect history to repeat itself, as the embattled president Macron seeks another person for the job. While he's likely to get there in the end, it will be a harder sell to the French public, while markets continue to let the story play out, knowing that the debt trajectory remains fundamentally unsustainable." 

Alex Everett, senior investment manager – rates management, at Aberdeen
"The fall of the Bayrou government had become an inevitability for markets, and French government bonds, known as OATs (Obligations assimilables du Trésor) had already moved wider. The real test is how President Macron responds now. The least bad option is to appoint yet another prime minister to try to break the political and economic impasse. The vote shows that the Assemblée Nationale remains as divided as ever. Meanwhile, the financial imperative is to pass a prudent, deficit-reducing budget, however unlikely that seems. At this stage, even a small reduction would be better than nothing. Confidence in the French economy is already at a low ebb, and the longer this situation continues, the greater the problem becomes.

"It is clear that France’s political quagmire will not be resolved this year, and perhaps not until the 2027 Presidential Election. This will likely keep OAT spreads elevated – at least around current levels – for months to come. We remain short OATs against peers."

David Roberts, head of fixed income at Nedgroup Investments 
“The biggest risk to French bonds is probably if Macron calls an election. There is nothing in the polls to suggest a clear winner, so a period of heightened uncertainty would eventually lead to a period of slightly lesser uncertainty. French bond returns typically follow those of German Bunds. And with the current wave of bond buying sweeping through the G7, there's a possibility that French bonds post positive total returns, albeit lower than those of their peers. Despite French bonds offering a significant excess yield compared with those of Germany, the ongoing uncertainty makes it difficult for us to own them. For now, despite improved value we continue to have zero exposure.”

Michaël Nizard, head of multi asset and overlay at Edmond de Rothschild Asset Management
“The political divide within the National Assembly left little doubt about the fate of the Bayrou government, and even though the latter wanted to believe in it until the end, the vote of confidence ultimately resulted in failure, hastening his resignation and the fall of his government. France thus finds itself in the same situation as last year after Mr Barnier's departure and is expected to experience its fifth prime minister in three years, signalling the significant political instability characterising the country since the beginning of Emmanuel Macron's second term.

“Whichever outcome of the current political crisis, the probability of a significant public finances reform will remain low, so much so that financial markets themselves seem resigned and might settle for a scenario where the budget deficit does not deteriorate further. Yet, without being catastrophic, the situation is worrisome as France diverges from the rest of the eurozone with the largest budget deficit. This deterioration in budget balances is mainly explained by a decline in tax revenues due to tax cuts granted to households. While many parties agree on the need to reduce public spending, which currently represents 57 per cent of GDP (vs 50 per cent average for the eurozone), it remains difficult to find a majority for measures that would bring the primary deficit below the debt-stabilising level. It thus stands to reason that the status quo should persist unless pressure from the European Commission and especially from financial markets intensifies, in which case more challenging choices will necessarily have to be made, likely following new legislative or presidential elections.”

Holger Schmieding, chief economist at Berenberg 
“The policy paralysis in Paris spells trouble for France and Europe. It makes it even more difficult for Europe to stand up to US President Donald Trump and Russian President Putin. Even more so than before, the onus is now on Germany to take the lead to defend European interests. President Emmanual Macron can still set foreign policy for France. But he does not control the purse strings and would struggle to get any international agreement ratified by parliament.

“After the fully expected fall of French Prime Minister Bayrou, ratings downgrades for French bonds seem possible. They would not come as a major surprise, though. A genuine financial crisis with a self-reinforcing doom loop – higher yields equal bigger deficits, which equal even higher yields – remains quite unlikely for the time being. With its almost balanced current account, France is no obvious candidate for a financial crisis. Of course, we cannot rule it out completely. If the French Socialists, who hold the balance of power in a deeply divided parliament, continue to reject common sense and insist on unfinanceable demands, the risk could rise.

European Central Bank president Lagarde will have to mince her words carefully this Thursday, neither suggesting that the ECB may eventually bail out an unrepentant fiscal sinner nor taking such a harsh line as to unsettle markets that still give France the benefit of the doubt.”