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French Bankers Fear Nightmare Choice in Presidential Elections

The unpredictable French elections could be opening the way to a nightmare scenario for finance: An anti-bank president.

A last-minute surge by the leader of far-left party La France Insoumise means that it is no longer unthinkable France will wake up April 24 to the prospect of a second-round clash between Jean-Luc Mélenchon, who wants a 100% tax on income of more than €400,000 and a financial transaction levy, and the far-right's Marine Le Pen, who argues for the return of the franc, as well as "intelligent protectionism," and a crackdown on immigration as native French are given priority access to services.

Both are openly antagonistic toward the financial sector, taunting centrist candidate Emmanuel Macron for his past as an investment banker at Rothschild & Cie Banque SCS, and Le Pen complains bitterly about French banks' refusal to finance her campaign.

While recent polls indicate a second-round vote is likely to be contested by Le Pen and Macron, Mélenchon is now only a few points behind the front-runners, while center-right François Fillon of Les Républicains, the party of former President Nicolas Sarkozy, still cannot be ruled out, despite a scandal over employing relatives which has led to formal investigations into both him and his wife. Le Pen would lose a run-off vote against any candidate, polls show, but that's not stopping financial market nerves about the tail risk of a far-right/far-left clash.

"Both Mélenchon and Le Pen have economic programs that take an aim at the banking world. The financial world would panic if either of them gained power," Jean-Charles Simon, president of economic consultancy Stacian, told S&P Global Market Intelligence in an interview.

"A potential election of Mélenchon or Le Pen would have a large impact on the profitability of the banks. It would strongly penalize the sector."

Mélenchon blames the financial world for causing both the economic crisis and France's large debt pile. He aims to provide a banking license for state-run investment bank BPIFrance Investissement SAS, which finances companies, so that it can tap the European Central Bank for €100 billion to pay for ecological spending programs as he introduces a 32-hour working week. His plan for the banking sector also includes separating investment banks from retail banks.

"He could force them to dismantle, and that would lead to investment banking shrinking in France," Sam Theodore, head of the bank rating team at Scope Ratings, said in an interview. Société Générale SA and BNP Paribas SA, two of the largest banks in the eurozone, would be worst affected, potentially having to retrench into retail banking, where there is little growth.

Job-cut plans on hold

Mélenchon also wants to stop lay-offs, which could end plans by several banks, including Société Générale SA and BPCE SA, to lower headcounts and reduce branch numbers.

"For the banks, the next few years will be critical with technological advances, which is leading them to cut branches and reduce personal," Theodore said. "If they don't have the political environment to support them, then they are not going to be able to carry out their plans and it will make them less competitive on the international market.

"The domestic market is highly saturated, and there is not a lot of growth there."

Riding a populist wave which has already propelled the U.K. toward the EU exit and Donald Trump to the White House, the National Front's Le Pen also blames banks for the financial crisis and wants France to leave the euro, reinstalling an exchange rate mechanism of the sort that existed in the lead-up to the creation of the single currency, thus permitting the Bank of France to print money to finance state spending.

Analysts warn that the mere prospect of France leaving the euro could reignite the debt crisis. She also wants to endfinancial speculation, reindustrialize the economy, ensure preferential interest rates for small businesses and halve rates that banks charge customers for loans and overdrafts.

"It would be a toxic economic environment, and with the banks being so dependent on the economy, it would hurt them," Theodore said.

Private sector 'puppets'

Le Pen said at a March 11 rally that Macron and Fillon, a conservative Catholic who wants to cut state spending, served the world of high finance and were "puppets in the hands of private interests."

Should either Mélenchon or Le Pen make it to the second round, bank stocks are likely to take a large hit, said Andrea Tueni, financial analyst at Saxo Banque. Hope, though, would arise from the likelihood that neither would be able to count on the parliamentary majority necessary to enact their policies after legislative elections in June. Le Pen's party has just two deputies in a parliament of 577 members, while Mélenchon's has none.

"What could really stop the bloodbath are the parliamentary elections," Tueni said.

A Macron victory would be a huge relief for the banking sector, Simon said, noting that both Macron and Fillon would be likely to plead in favor of looser European banking regulation as a means of boosting investment in the economy.