French Credit Risk at Three-Month High

Socialist Presidential Candidate Francois Hollande
Socialist candidate Francois Hollande, who had a 16 point lead against rival President Nicolas Sarkozy in a CSA poll yesterday, has called finance his “biggest adversary”. Photographer: Philippe Huguen/AFP/Getty Images

French credit risk is at the highest in three months on concern anti-business policies will be adopted after the presidential election as Europe’s debt crisis deepens.

Credit-default swaps on Credit Agricole SA, the nation’s third-largest lender, were the worst-performing among European financial companies yesterday while France Telecom SA led an increase in corporate default risk. The cost of insuring the nation’s sovereign debt is at the highest in three months ahead of the first round of voting on April 22.

Socialist candidate Francois Hollande, who had a 16 point lead against rival President Nicolas Sarkozy in a CSA poll yesterday, has called finance his “biggest adversary”. Hollande pledged to increase corporate and bank taxes, introduce a 75 percent levy on earnings of more than 1 million euros ($1.3 million) and cut the retirement age to 60 from 62.

“Some of Hollande’s proposals are potentially significant head winds for French banks and companies,” said Roger Francis, an analyst at Mizuho International Plc in London. “It’s a recipe of tighter regulation and increased taxes which makes for a less business-friendly environment.”

Credit-default swaps on BNP Paribas SA, the nation’s largest lender, jumped 20 basis points this week to 257.5 and Societe Generale SA, the second biggest, climbed 19 to 333.5, both the highest in three months. Credit Agricole rose 30 this week to a four-month high of 321 while France Telecom increased 9 basis points to 134. Swaps on French government debt cost 200 basis points.

Democracy ‘Betrayal’

Hollande is campaigning for a more activist European Central Bank and a revision of the European Union’s fiscal compact which he has called a “betrayal of French sovereignty and democracy.” That puts him at odds with German Chancellor Angela Merkel who has campaigned for Sarkozy, struggling against public dissatisfaction with unemployment at a 12-year high.

Hollande says he will eliminate the nation’s budget deficit by 2017, a year later than Sarkozy’s plan. The gap was 5.2 percent of gross domestic product in 2011 and will narrow to 4.4 percent in 2012, Finance Minister Francois Baroin said April 17.

“A Socialist administration is likely to be less corporate-friendly than the current one,” Andrew Garthwaite, a global equity strategist at Credit Suisse Group AG in London, said in a note to investors. “We are concerned by Hollande’s talk about wanting to renegotiate the fiscal compact, his suggestions that he might try to change the mandate of the ECB as well as his lack of personal chemistry with Angela Merkel.”

Corporate Tax

The Socialist has pledged to introduce a variable corporate tax rate, which would rise to 35 percent from 33 percent for large companies, and an additional 15 percent tax on bank profits, Garthwaite said in the note.

The cost of insuring debt of Electricite de France SA climbed 10 basis points this week to 134, while Cie de St. Gobain, Europe’s biggest supplier of building materials, is 15 higher at 155.

A basis point on a credit-default swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

“The main risk is that he will not try to reduce the deficit,” Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam, said of Hollande. “He is more likely to introduce measures to promote growth. You can expect credit risk will continue to rise.”

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