Mizuho: This Is Not 2017

Mizuho write “the coming French legislative election will most likely leave France with a hung parliament.”

• “This should prevent EU fragmentation fears from coming back (for now). However, a hung parliament also means less unity to deliver debt consolidation.”
• “Debt metrics look poor for France and, in our view, no outcome will ensure sufficient spending cuts to bring the debt-to-GDP trajectory back down.”
• “OAT-Bund spreads will likely relief-tighten if a left-wing majority scenario is avoided. Having said that, we don’t think OAT-Bund spreads will manage to sustain the tightening.”
• “Our economic analysis suggests that French long-term bonds should reprice and trade more like A-rated European govies.”
• “We see 10Y OAT-Bund spreads around 75-85bp in the medium-term, with the tail-risk of an aggressive widening to 120bp if the New Popular Front wins a majority and EU fragmentation risk is on the table again.”