By Divya Chowdhury
MUMBAI (Reuters) – France’s ‘AA’ sovereign status could be at risk after Sunday’s election delivered a hung parliament, though ratings agencies will probably wait until September before assessing their current stance, Generali Asset Management’s fixed income head said.
“We have to see how rating agencies will judge France in the next months, reminding that (its) ‘AA’ status is at risk, in our opinion,” Mauro Valle, head of fixed income at Generali Asset Management, told the Reuters Global Markets Forum on Tuesday.
Valle said choosing a new prime minister might take some time, expecting a delay during the Paris Olympic Games from July 26 through Aug. 11.
The French leftist alliance unexpectedly took the top spot in the run-off vote, thwarting Marine Le Pen’s far right National Rally’s quest for power, but conceded that talks to form a government would be tough.
Valle says there is a risk to markets from France’s large fiscal deficit, which a hung parliament is likely to “manage with difficulties”.
“Debt risk is worrying in France,” he said, and the country will now have to reduce it, with no clear leadership in place.
Valle expected the OAT-Bund spread to widen again, saying: “In absolute terms, the 10-year OAT can decline, as bund rates are expected to move downwards from 2.5%.”
“After the result of the second round (vote on Sunday), OAT-bund spreads are consolidating around 65 basis points, but we believe this should be the lower part of the range,” he said.
More broadly, as central banks cut rates amid declining inflation, Valle prefers to “stay long-duration in rates” in Europe, and “neutral-to-positive” in the U.S.
He expects two cuts from the Federal Reserve this year, in September and December, adding that if the Fed were to delay cuts until the end of the year, it might be problematic for ECB President Christine Lagarde to deliver two more cuts in 2024.
“For the moment, we continue to expect Fed cuts, and ECB can continue to be data dependent and cut two times if consumer inflation will decline as expected,” Valle said.
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(Reporting by Divya Chowdhury in Mumbai; Editing by Bernadette Baum)
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