A shock election win for France's leftist alliance has reinforced wariness among investors who had already braced for the risk of political deadlock and a policy paralysis that's unlikely to improve the country's creaking public finances, reports Reuters.
The left-wing New Popular Front (NFP) alliance won the most seats in Sunday's election, but fell far short of an absolute majority, a big surprise after Marine Le Pen's far-right National Rally (RN) led opinion polls.
France, at the centre of the euro project and the bloc's second biggest economy, still faces a hung parliament and taxing negotiations to form a government as markets had already anticipated - just with the left in pole position, rather than the far-right.
The risk premium, or spread, for holding France's debt over Germany's was at 65 basis points on Monday, a touch lower from Friday. It remains below the 12-year high hit in June at 85 bps.
Still, that gap is not expected to tighten again rapidly with concern fixed on what France's new political climate means for its stretched public finances that have left it facing European Union disciplinary measures.
Debt stood at 110.6 per cent of output in 2023.
"For any budget to be passed in the new assembly, probably at the margin some fiscal loosening is required to get a compromise," said Kevin Zhao, head of global sovereign and currency at UBS Asset Management, which manages $1.7 trillion in assets.
Market relief proved tentative on Monday. France's main CAC 40 stocks index, down 3.7 per cent since Macron called the election, rose as much as 0.8 per cent on Monday then gave up all its gain.
Shares in France's three biggest lenders - BNP Paribas, Societe Generale and Credit Agricole - which have dropped as much as 9.8 per cent since June 9, also reversed earlier gains and were down 0.4 per cent-1.2 per cent at 1418 GMT.
Banks had been hard hit in the run-up to the vote on concerns that higher political uncertainty would translate into increased economic risks and fears of possible windfall taxes.
With the left more than 100 seats short of an absolute majority and President Emmanuel Macron's centrist grouping in second place, a hung parliament was still seen as the best outcome for investors in French assets, with it expected to limit the left's spending plans and avert a potential budget-driven market crisis.
The NFP's plans include scrapping Macron's pension reform raising the minimum wage and capping the prices of key goods.
It says the costs of its program would be offset by measures including tax increases.
But some investors had deemed an NFP absolute majority a bigger threat to markets than the RN, as the left alliance has said it doesn't plan to reduce France's high budget deficit.
"When you look at the composition of the parliament, the bar for the far-left to start doing anything market unfriendly is very, very high," said Gabriele Foa, portfolio manager at Algebris Investments, noting that the more moderate Socialists won a sizable share of the NFP seats.
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