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Markets Are Right to Take a Le Pen Presidency Seriously

The National Front leader continues to win support, both in polls and from the bookmakers.

Political soothsayers remain convinced that National Front leader Marine Le Pen won’t succeed in her bid to become French president in the country’s two-stage election. Traders and investors seem less relaxed about the outcome. After the shocks of the U.K. voting for Brexit and Donald Trump becoming U.S. president, they’re right to be taking out extra insurance.

According to figures compiled by the website, the three main candidates are now neck-and-neck to become the next French president, based on the odds available from bookmakers. Republican candidate Francois Fillon has recovered ground lost during revelations he paid his family as staff members, while independent candidate Emmanuel Macron has slipped in the betting:

Too Close for Comfort

Percentage chance of each candidate winning the French Presidency, based on aggregated betting odds

Source: via Bloomberg

The only constant in the race is Le Pen. A poll by Elabe for L’Express magazine, published on Tuesday, repeated what other surveys have shown, namely that the National Front chief wins the first round on April 23, and gets defeated in the second ballot on May 7.

But the poll also showed her narrowing the gap to both Fillon and Macron in that second round, garnering support of more than 40 percent for the first time. Against Fillon, for example, she’d lose by a margin of 44 percent to 56 percent. For many onlookers, that gap is too close for comfort.

As a result, French borrowing costs have been heading higher, with the 10-year yield surpassing 1 percent for the first time in a year. But it’s the yield spread to Germany, the euro region’s benchmark borrower, that’s showing the most stress, reaching its widest since July 2012:

Widening Differential

Gap between French and German 10-year yields

Source: Bloomberg

Traders have also driven up three-month implied volatility for the euro in recent weeks. The volatility measure is at its highest level since June, when it briefly peaked after the U.K. referendum decision to leave the European Union. The current wrangles over Greece probably aren’t helping sentiment. But the jump echoes Le Pen’s improvement in the polls in recent weeks, suggesting French election concern is the key driver:

Surging Volatility

Euro versus dollar, three-month implied volatility

Source: Bloomberg

Le Pen says she plans to redenominate the bulk of French government debt into new French francs, a move that Bank of France Governor Francois Villeroy de Galhau says could add as much as 30 billion euros ($32 billion) to the nation’s annual debt servicing costs.

Even President Le Pen would face several obstacles to implementing any such proposal, as my Bloomberg Intelligence colleague Maxime Sbaihi has argued. She’d need to persuade the National Assembly and the Senate to back her; but her party is unlikely to be in a position to do that after June parliamentary elections. She’d then need to win the resulting referendum in a nation where only 37 percent of respondents to the European Commission’s Eurobarometer survey view the euro as a “bad thing,” compared with 53 percent seeing it as a “good thing.”

But the emergence of an anti-euro leader in one of the European project’s founding members would be enough to undermine confidence about the future of both the common currency and the EU itself, even if Le Pen proved unable to carry out her “Frexit” threat. Perhaps more to the point, Le Pen’s economic program inspires no confidence that under her France will tackle the reforms it badly needs.

The double surprise of the Trump presidency and the Brexit referendum has undermined trust in opinion polls, which have a good track record in France. But there’s no doubting the renewed willingness of voters to send a strong message. Financial markets are right to be on guard.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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    Mark Gilbert at

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