French Socialist Win Sets Bond, Franc Markets on Edge

French bonds and the franc are poised to fall amid heightened concerns about public policy following the unexpected victory of the Socialist Party’s presidential candidate in Sunday’s preliminary ballot.

“Markets are going to be nervous,” said Paul Horne, international economist at Smith Barney Inc. in Paris. “Tomorrow we will see the franc going down.”

He was speaking after nearly completed returns showed that former Education Minister Lionel Jospin will face Jacques Chirac, leader of the conservative Rally for the Republic party, in the decisive ballot on May 7.

Interior Minister Charles Pasqua announced that Jospin won 22.99% of the votes cast, Chirac 20.14%, conservative Prime Minister Edouard Balladur 18.80%, and Jean-Marie Le Pen, leader of the right-wing National Front, 15.09%.

Opinion polls during the past two months had shown Chirac clearly winning today’s round. Early indications support the view of Horne and others that the franc and the price of French securities are headed down.

In London, the franc was recently quoted at 3.58 per German mark, well down from 3.5573. Economists see it perhaps eclipsing the all-time low of 3.59 reached on March 10.

It was then that opinion polls showed Paris Mayor Chirac taking the lead from Balladur. Investors remain skeptical about Chirac’s commitment to a European monetary union, although he made statements during the campaign in support of closer economic and monetary ties within Europe.

Overnight markets are thinly traded, and analysts said it will not be clear where the franc is headed until European markets are fully up and running tomorrow morning.

“If the market perceives that Chirac is losing ground and it perceives he’ll continue to do so, that means it’s anyone’s game and that just opens the way for people to attack the franc,” said Steve Major, head of bond market research at Credit Lyonnais.