(Bloomberg) -- Emmanuel Macron said his position as France’s president won’t be affected by the result of legislative elections as a report he is considering quitting triggered a selloff in French government bonds.

Macron, 46, was asked in an interview with Figaro Magazine what he will do if Marine Le Pen’s far-right National Rally wins the vote — due over two rounds concluding July 7 — and then calls for his resignation. 

“It is not the National Rally that writes the constitution, nor the spirit of it,” Macron said. “The institutions are clear, and so is the place of the president, whatever the result. It’s inviolable for me.”

Investors have been unnerved by the president’s shock decision to dissolve parliament on the back of his party’s crushing defeat in Sunday’s European Parliament elections. 

Further uncertainty was injected Tuesday by Eric Ciotti, the head of the center-right Republicains, who said that his party should ally with Le Pen’s National Rally, with “its candidates, with all those who identify with ideas of the right, with the values of the right.” 

Still, other senior members of the party were quick to reject Ciotti’s call, suggesting the Republicains, which has been divided on how closely to co-operate with the far right, could disintegrate in the run-up to the election.

European fallout

The national vote confronts France’s European partners with the risk of Le Pen’s party taking control of the legislature for the first time. That would threaten to upend Macron’s response to the war in Ukraine, while reverberating across Europe’s relations with China and the US in the face of the potential return of Donald Trump to the White House. 

Macron had been due to hold a press conference to set out his campaign agenda on Tuesday afternoon but that was pushed back until Wednesday. 

The yield on 10-year French bonds, known as OATs, jumped as much as 10 basis points Tuesday, and widened the spread over equivalent German bonds to the highest level since the start of the Covid-19 pandemic in March 2020 on a closing basis. Italian securities, considered among the region’s riskiest given the government’s debt pile, were swept up in the rout for a second day, with the spread over bunds jumping to 150 basis points.

In another sign of the political maneuvering under way, Marion Marechal, vice president of the hard-right Reconquete party whose leader Eric Zemmour has expounded on the “great replacement” conspiracy theory, announced that Le Pen’s party had abruptly ended talks to join forces ahead of the snap vote. 

The decision doesn’t align with “the hope it triggered in the French people,” Marechal, who is Le Pen’s niece and a former member of her party until she distanced herself politically, said on X. Describing it as a “big disappointment” for France, she added: I hope with all my heart that this refusal to organize a real coalition will not lead to a new victory for the coalition of Emmanuel Macron.”

Budget holes

An outright victory for Le Pen is still not the most likely outcome, but even if Macron manages to contain his losses, he’s probably going to be left managing a divided parliament with little or no power to push through his plans to address the flaws holding back France’s economy. 

A poll published Monday of first-round voting intentions put the National Rally at 34%, with Macron’s group trailing at 19%. 

In particular, plugging holes in the budget will become even more challenging if Macron loses control over parliament and the government. S&P Global Ratings last month downgraded the nation’s credit score, saying the deficit will remain above 3% of gross domestic product through 2027. France’s fiscal watchdog says the government’s deficit strategy lacks coherence and credibility.

“Potential political instability is a credit risk given the challenging fiscal picture the next government will inherit,” Moody’s analysts said, noting that the snap vote increases the risks to France’s efforts to reduce the budget deficit, which slipped off course at the start of this year. 

Government ‘struggling’

“Macron’s government was already struggling with fiscal consolidation, and the concern is now that any National Rally government will follow a Trump-esque approach to fiscal consolidation – i.e. trying to grow its way out of the problem,” said Chris Turner, ING’s global head of markets.

He flagged that the European Commission is likely to focus attention on Macron’s struggles to stabilize France’s public finances when finance ministers meet on June 19. That’s the date when the commission could decide to launch its Excessive Deficit Procedure against France, an action designed to force member states to get poor public finances in line with EU rules. 

Macron has been fiercely pro-European since he came to power in 2017 and criticism from Brussels would likely boost Le Pen’s campaign. The 55-year-old nationalist has been skeptical about the European Union throughout her career and in the past has argued that France should leave the bloc to have more freedom to set policy. 

“A new election is a high-risk strategy in times of heightened geopolitical risk in the first place,” said Kaspar Hense, senior portfolio manager at RBC BlueBay Asset Management. 

As the campaign gets under way, Macron is set to exit the domestic stage as he travels to the Group of Seven summit in Italy this week. 

He’s just one of a series of leaders who are also struggling and facing elections. But his political future and that of France will be a dominant topic in Apulia, both among his colleagues and for markets. 

The size of the moves are unusual for French bonds, among the most liquid in the European market and traditionally viewed as substitutes for bunds, the region’s safest asset. The volatility “shows a change of risk perception on OATs,” said Societe Generale SA strategist Adam Kurpiel.

The French equity benchmark CAC 40 was down 1.2%, hitting its lowest level in nearly four months. Banks took the biggest hit, with Credit Agricole SA down 3.8% and Societe Generale SA tumbling 3.2%. The index has retreated 2.6% so far this week, set for its biggest two-day drop in nearly a year.

--With assistance from Samy Adghirni, William Horobin and Constantine Courcoulas.

(Updates with Marion Marechal comment, Moody’s from 10th paragraph.)

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