SWAPS/CDS: Broad Measures Underscore Localised French Political Risk

Market-implied measures of risk sentiment reaffirm our view that the French election poses limited systemic risk.

• Schatz ASWs have extended the tightening seen after the first round of voting in the French election, nearing pre-snap election announcement levels.
• This comes as the odds of an RN absolute majority fade, owing to the tacit ‘Republican Front’ election agreement between the leftist alliance and Macron’s Ensemble.
• It is also worth remembering that ‘Frexit’ has fallen by the wayside when it comes to RN policy preferences.
• This is underscored by the fact that the ‘03/’14 French 5-Year CDS basis spread failed to get anywhere near 2017 election cycle highs during the run up to the first round of voting. That spread has also tightened this week.
• As a reminder, the legalities binding CDS contracts subject to ’14 conventions mean that an exit from the Eurozone and subsequent currency redenomination would represent a credit event for those contracts.
• Meanwhile, redenomination does not represent a credit event for CDS contracts bound by ’03 conventions
• This means that the spread between the two provides a trackable gauge of ‘Frexit’ risk.

Fig. 1: Schatz ASW (vs. 3-Month Euribor)

Source: Bloomberg

Fig. 2: France 5-Year CDS ‘03/’14 Basis Spread