- PM Lecornu resigns
- French risk premium spikes to January high
- French banking shares, bonds under pressure
- Credit default swaps jump
LONDON, Oct 6 (Reuters) - French stocks and the euro fell while France's borrowing costs jumped on Monday, as the government quit just hours after being appointed, wiping millions of dollars off the stock market and fuelling uncertainty over the euro zone's second-largest economy.
Prime Minister Sebastien Lecornu unexpectedly handed in his resignation to President Emmanuel Macron hours after announcing his cabinet line-up - making it the shortest-lived in modern French history.
Paris' $3 trillion CAC 40 index dropped more than 1.5%, making it by far the worst-performing index in Europe.
ONLY 12 HOURS INTO THE JOB
Shares in major lenders tumbled, leaving BNP Paribas, Societe Generale and Credit Agricole down 4%-5%.
The euro , which has weathered much of France's political turmoil in the last year, slid 0.7% on the day to $1.1665.
"It’s concerning that the new cabinet only lasted 12 hours," said Danske Bank analyst Kirstine Kundby-Nielsen.
"There seems to be no willingness in parliament for a budget to be passed, so I think yields higher, pressure on euro-dollar in the near term."
French mid-cap stocks were hit hard, tumbling 2.6% and set for their largest one-day drop since April, while other European markets did not go unscathed either. The broader STOXX 600 dipped 0.3%, Germany's DAX was a touch weaker.
France has the largest budget deficit in the euro zone, which is almost double the European Union's preferred limit of 3%.
Its problems take the shine off this year's European stocks rally, which has been driven by increased spending on security and infrastructure from the likes of Germany.
France's long-term finances were already vulnerable, and politics has become increasingly unstable since Macron's re-election in 2022, given the lack of any party, or grouping holding a parliamentary majority.
Successive prime ministers - France has now had three in under a year - have tried and failed to push through unpopular budgets and on Monday, Lecornu's cost him his job.
"It certainly makes people wary about European assets at this point because of the uncertainty and the spillover effects that go from France just being unable to find its way out of this malaise," IG Group chief market analyst Chris Beauchamp said.
BORROWING COSTS SOAR
French bond prices dropped, pushing yields on benchmark 10-year debt up almost 9 basis points to around 3.59%. That left the premium investors demand to hold French debt, rather than triple-A rated German paper , at 86.54 bps, the most since January this year.
This spread hit a 2012 high of 90 bps in last November.
Investors are worried about France's creditworthiness, compounded by a ratings downgrade last month. On Monday, credit default swaps - a derivative that reflects the cost of insuring against a sovereign default - rose to 41 bps, the most since April, up from 38 bps on Friday.
"The bigger question is how does this all resolve itself? " said Pepperstone senior research strategist Michael Brown.
"Because there doesn’t seem to be an obvious solution or obvious silver bullet that we can look to to resolve it overnight."
Additional reporting by Samuel Indyk, Lucy Raitano and Shashwat Chauhan ; Editing by Andrew Cawthorne, Dhara Ranasinghe and Hugh Lawson
Source: Reuters