Marine Le Pen. REUTERS
Marine Le Pen. REUTERS

French elections are worrying credit investors more than Britain's exit from the European Union. While ratings agencies see little chance of either country going bust, it now costs over a third more to insure against a Gallic default than a British one. The scope to weaken its currency is what makes the United Kingdom a slightly better credit risk.

Five-year French credit default swaps (CDS) were at 40 basis points on Jan. 27, which means it would cost 40,000 euros to protect 10 million euros of exposure to French bonds, according to data from financial information company Markit. Comparable UK CDS were at 28 basis points. The extra cost for insuring against a French default rather than a British one recently hit its highest since the fourth quarter of 2015.

During most of the second half of 2016 it cost more to insure against a UK default than a French one as investors focused on how much the British economy might suffer after leaving the European Union. Over the past two months, however, jitters about French presidential elections in April and May have come to the fore.

Investors can be forgiven for feeling nervy after being caught off guard by Britain's EU vote and the election of U.S. President Donald Trump. Even so, the market pricing is odd in some ways. Britain and France have very similar credit ratings and roughly comparable levels of debt relative to GDP. But the UK faces a much longer and more profound period of uncertainty as it seeks to remove itself from the EU. French elections, by contrast, will probably bring far less flux.

Polls show far-right leader Marine Le Pen, who wants to reintroduce a national currency alongside the euro, will be beaten by either the centre-right's Francois Fillon, who wants to cut government spending, or Emmanuel Macron, a reformist who served in the Socialist government and is now running as an independent. Socialist pick Benoit Hamon, who has more radical left-wing policies, is not a contender, based on current soundings.

Still, for credit investors, the important difference between the UK and France is that the former has its own currency, which gives it scope to devalue its way out of problems, whereas the latter is locked into the euro. Getting repaid in a weakening currency is far from ideal, but beats not being paid at all.


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