LONDON (Reuters Breakingviews) - What happens in France might not stay in France. But the fact that it might happen at all is now being reflected in the bond market.
For investors in France, the main question for 2017 is whether far-right candidate Marine Le Pen has a hope of winning the presidential vote. Polls show that she will lose in a second round run-off against the opposition centre-right's Francois Fillon, but French government bonds have been trailing their euro zone peers in the past month. With little change in France's growth prospects or policies, it's reasonable to assume investors have started rating Le Pen's chances at better than zero, especially after Donald Trump's surprise win in the U.S. presidential election.
Yields have risen more markedly in France than many other euro zone countries. The gap between 10-year French and German yields has nearly doubled since end September, the spread against Austria has risen sixfold, while 10-year Gallic bonds now yield 12 basis points more than Belgian ones, rather than one basis point less. Meanwhile, the premium investors demand for buying Spanish debt over French bonds has fallen.
The cost of insuring against a French default has risen, though it remains relatively low. November saw the biggest monthly percentage increase in these costs since 2011 - notable since there was no generalised increase. But, as the euro zone debt crisis showed, local problems can quickly turn into regional ones.
Le Pen is a far cry from the economic reformer that investors typically prefer. In this case what matters is more her antipathy towards the European Union than her stance on the budget or labour market. The National Front leader has promised to hold a referendum on France's membership of the EU if elected.
There are many electoral hurdles in her way. But investors are now wary of ignoring unlikely outcomes, especially in a country so pivotal in Europe. France is one of the founders of the EU and, along with Germany, a key driver of the euro project. But her citizens have an even more unfavourable opinion of the EU than the British, a Pew Research Center survey showed earlier this year. The greater the chance they might be able to vent their spleen in a plebiscite on the EU, the further the French bond market rot will spread in Europe.