Markets more worried about Greece than France

Financial markets will likely be more worried about the outcome of the Greek election and the future of its international bailout than Francois Hollande's winning the French presidency, analysts said. "The week ahead looks to be high risk, but paradoxically it is maybe Greece that weighs heavier in the balance than the French election," said Valerie Plagnol, director of research at Credit Suisse. Greece's two main parties suffered big losses, with anti-austerity parties winning up to 58 percent of the vote, according to exit polls. With such a strong showing by anti-austerity parties, the EU and International Monetary Fund might be forced to halt rescue funds to Greece, worries Stephane Deo at UBS bank. "The government quickly wouldn't be able to pay its employees and pensions, which would generate high tension on the financial markets," he warned. Even if the main parties, the conservative New Democracy and Socialist PASOK which have supported the austerity programme, somehow cobble together a coalition, they will likely try to renegotiate the bailout. Both have said they want more slack in their two bailout deals worth 240 billion euros ($314.0 billion) to try to accelerate a recovery of the country's economy which is in a fifth year of recession. The election result is also likely to renew speculation of Greece being forced out of the euro, setting a precedent that will send fear through other struggling eurozone countries. Berenberg Bank economists said they "see a 40 percent risk of a Greek euro exit this year." In France, Socialist Francois Hollande defeated right-wing incumbent Nicolas Sarkozy in a run-off on Sunday, ending a 17-year hold by the right on the presidency. But unlike Francois Mitterand's election in 1981 which sent markets tumbling, it appears investors will take the victory of a Socialist in stride. Paris' stock market has slid in recent weeks, but has only been tracking other European markets gripped by renewed fears about the eurozone debt crisis. Perhaps a better indicator of market views of a Hollande victory is the French state's borrowing costs, which fell in the weeks leading up to the election. On Thursday France placed 7.5 billion euros of medium- and long-term debt at lower rates. One of the major areas of concern has been a possible showdown between Hollande and German Chancellor Angela Merkel on growth versus austerity. "In case of victory, Hollande likely won't throw the European treaty of financial stability into doubt, but rather add a chapter about growth," said Plagnol. "On that point, he isn't the only one who would like to see that in Europe, which is reassuring," she added. European Central Bank chief Mario Draghi has called for a "growth compact" to complement the fiscal compact agreed in March which will put teeth into European rules to cut down deficits and debt, saying growth should be put back at the "the centre of the agenda". Merkel, a leading advocate of austerity measures, has also conceded the need for a growth strategy. A number of proposals are under discussion, in particular boosting EU-wide investment via the European Investment Bank and use of so-called structural funds. A Paris-Berlin summit to discuss these questions is likely to take place quickly after the election. An informal European Union summit on growth and employment is also being considered for late May or early June. BofA-Merrill Lynch bank's chief European economist Laurence Boone said a switch of power in France isn't causing concern as "investors expect a restrained social policy" from Hollande. But Philippe Waechter, director of economic research at Natixis Asset Management, said it would be important for Hollande to have a large majority. "If not, there could be concerns of a series of pacts during the legislative elections which could hinder certain budgetary decisions," he added. Early estimates gave Hollande victory with between 51.8 and 52 percent of the vote.