PARIS/LONDON Two hard-left candidates said on Friday they were discussing cooperation in their bid for the French presidency, jolting investors already nervous over the possibility of a win for far-right, anti-globalisation candidate Marine Le Pen.
Socialist party officials and pollsters said cooperation between Benoit Hamon and Jean-Luc Melenchon was very unlikely, due partly to their policy differences, but French bond yields rose amid uncertainty over its possible impact on the election.
Investors believe a tie-up could either backfire and catapult Le Pen into the Elysee palace or succeed and land France with a far-left president pursuing deficit-boosting economic policies.
A Cevipof poll published on Thursday gave Hamon, who won a primary last month to become the Socialist party's candidate, 14-14.5 percent in the first round of the election on April 23. Melenchon, who has Communist backing, had 11.5-12 percent.
They are well behind frontrunners Le Pen, centrist Emmanuel Macron and Francois Fillon of the centre-right, but a combined vote could allow one of the leftists to survive the first round and possibly face Le Pen in the decisive May 7 second round.
Pollsters have not predicted what might be the outcome of such a scenario, but investors were taking a view on Friday.
"That would be the worst possible outcome as far as investors are concerned," said KBC strategist Piet Lammens.
"All of us thought the first round would go to Le Pen and the second would go against her, but now that is doubtful. Also, Hamon is not left wing a la (Socialist President) Francois Hollande, he is much further left – he has talked about universal income, working less, earlier pensions – so whether he wins or Le Pen wins France would go backwards."
LEFTISTS STILL FAR APART
The premium investors demand to hold French government debt instead of German debt increased after Hamon spoke.
France's 10-year government bond yield climbed 3 basis points on the day to 1.04 percent before settling back to a 1 basis point rise, and the yield spread over Germany rose 8 bps to 73 bps before giving up its highs to stand 5 bps higher.
Hamon and Melenchon are far apart on the policy front and Melenchon has been adamant he will not step aside for Hamon.
"We are having discussions and we will continue to have discussions," said Hamon, a 49-year-old former education minister who beat more right-leaning candidates for the Socialist ticket in January.
"We have talked and we will talk again today," he said on France Info radio, acknowledging talks would be "difficult".
Melenchon, who quit the Socialist party in 2008 to form his Left party, sent a letter to Hamon confirming the talks but setting tough conditions and saying he "no longer had any confidence in hollow deals between political parties".
Among his conditions was that Hamon should denounce the five-year term of the governing Socialists he represents and support his anti-EU and anti-NATO positions - policies unacceptable to Hollande's party.
"It would not be easy," Hamon said. "He knows it as I do. What clearly separates us is the European ideal."
Socialist party chief Jean-Christophe Cambadelis said he doubted unity could be achieved, given Melenchon's demands.
Frederic Dabi of Ifop pollsters also doubted the Hamon-Melenchon talks would get anywhere, saying: "It's starting too late, and neither of them will pull out."
Hamon and Melenchon said their talks would also involve green party candidate Yannick Jadot, who the Cevipof survey showed winning 2 percent of the vote in the first round.
(Additional reporting by Sudip Kar-Gupta, Ingrid Melander and Abhiv Ramnarayan; Writing by Andrew Callus; Editing by Richard Balmforth and Gareth Jones)