Hollande victory could roil US markets this week

By CHRISTOPHER S. RUGABER,AP Economics Writer Updated at 2012-04-22 21:58:17 +0000

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WASHINGTON (AP) — A strong showing by Socialist candidate Francois Hollande in the first round of France's presidential election Sunday may rattle U.S. and global financial markets in the coming weeks.

Hollande wants to renegotiate a European treaty, agreed to just last year, intended to limit excessive government spending. He has also promised to roll back some deficit-cutting reforms put in place by his opponent, current President Nicolas Sarkozy.

Many economists fear that if Hollande wins a second-round election, to be held May 6, those steps would upset the delicate cooperation with Germany that has been key to Europe's response to its financial crisis. Sarkozy has formed a partnership with German chancellor Angela Merkel on Europe's debt crisis, so close that many commentators refer to them as "Merkozy."

"Europe is not 'fixed' yet, but if you have France and Germany agreeing on certain policies, that makes it more likely they will fix it somehow," said Jay Bryson, global economist at Wells Fargo Securities. Disagreement between the countries' leaders raises the risks that Europe's crisis could worsen, he said.

Hollande captured nearly 28 percent of the vote in Sunday's election, to almost 27 percent for Sarkozy. They finished at the top of a 10-candidate field.

The results come as the European debt crisis has flared again after months of relative quiet. Many analysts question whether Italy and Spain can stick to steep budget cuts and labor market reforms that they have promised to get their finances and order and jump start economic growth.

Italian and Spanish bond yields, after falling earlier this year, have risen in recent weeks. That indicates investors see the bonds as riskier and are demanding higher rates to buy them.

The renewed fears about Italy and Spain make it a particularly risky time for France and Germany to disagree over how to resolve the debt crisis, economists said.

"It raises uncertainty, and markets never like uncertainty," Bryson said.

That increased risk, in turn, makes it more likely that investors in the United States will shift money to safer assets — U.S. and German government bonds, for example — and away from riskier holdings, such as stocks.

Bonds from highly indebted European countries, such as France, Italy and Spain, are also likely take a hit. Hollande's campaign promises, such as his commitment to lower France's retirement age, could worsen the country's budget deficit.

And his pledge to raise the top tax rate for the wealthiest in France to 75 percent would slow the country's economy, economists say. That would make it harder to generate the tax revenue to pay off its debts.

There are already some signs that investors are worried about the election's ultimate outcome. Dan Greenhaus, chief economic strategist at BTIG, an institutional brokerage, said that yields on France's 2-year bonds have jumped in recent weeks.

"Nervousness about the election is clearly having an effect," he said.

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