Since the UK’s Brexit referendum in June 2016 and Donald Trump rise to power, the world has been preoccupied with the rise of populism. Marine Le Pen, the French National Front’s presidential candidate and European face of the movement, is commanding the attention of markets.
Worries over the French far right presidential candidate’s euroscepticism are driving a wedge between the OAT and Bund curves, with painful consequences for Europe’s SSA borrowers. Le Pen’s manifesto promise to pull France out of the eurozone and hold a referendum on EU membership is alarming investors who are already skittish over the direction of rates in Europe.
Agence Française de Développement found itself forced to pull a dollar three year thanks to “recent markets volatility” — surely code for a spiking OAT curve.
Given AFD’s proximity to the French sovereign, it is unsurprising that the moves in the OAT curve should disrupt its funding but the pulled deal shows that Le Pen is already casting a long shadow over European public sector issuance.
The steepening French curve left the European Financial Stability Facility’s 26 year deal looking pricey, in spite of an 8bp new issue concession. The supranational found only lukewarm interest, selling €1.5bn into a book of €1.575bn (excluding orders from joint lead managers).
EFSF believed there would be sufficient interest for the deal, even after ESM launched a €3.5bn 29 year issue only two weeks ago, saying that there was plenty of leftover demand. However, the outlook for Europe has swiftly darkened since then, and, with government bond spreads widening, non-sovereign issuers will find it difficult to coax investors into committing to size, especially at the long end.
There are a host of reasons why investors are expecting rates in euros to rise: the return of inflation, the approaching end to the ECB's quantitative easing programme... but none of these has caused the traumatic volatility that Le Pen has induced. All can be predicted and priced for, in a way that political turmoil cannot.
In the aftermath of Brexit, the European Union is looking ever more fragile and, although Le Pen is still an underdog (3.5 to 1 vs Macron's 2.4/1), she is already causing dangerous volatility. Unless her opponents mount a convincing defence, the capital markets will have to endure further casualties of her controversial candidacy.