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PM Lecornu resigns

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French risk premium spikes to January high

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French banking shares, bonds under pressure

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Credit default swaps jump

By Amanda Cooper and Samuel Indyk

LONDON, Oct 6 (Reuters) - French stocks and the euro

fell while France's borrowing costs jumped on Monday, as the

government quit just hours after being appointed, wiping

millions of dollars off the stock market and fuelling

uncertainty over the euro zone's second-largest economy.

Prime Minister Sebastien Lecornu unexpectedly handed in his

resignation to President Emmanuel Macron hours after announcing

his cabinet line-up - making it the shortest-lived in modern

French history.

Paris' $3 trillion CAC 40 index dropped more than

1.5%, making it by far the worst-performing index in Europe.

ONLY 12 HOURS INTO THE JOB

Shares in major lenders tumbled, leaving BNP Paribas

, Societe Generale and Credit Agricole

down 4%-5%.

The euro, which has weathered much of France's

political turmoil in the last year, slid 0.7% on the day to

$1.1665.

"It's concerning that the new cabinet only lasted 12 hours,"

said Danske Bank analyst Kirstine Kundby-Nielsen.

"There seems to be no willingness in parliament for a budget

to be passed, so I think yields higher, pressure on euro-dollar

in the near term."

French mid-cap stocks were hit hard, tumbling 2.6%

and set for their largest one-day drop since April, while other

European markets did not go unscathed either. The broader STOXX

600 dipped 0.3%, Germany's DAX was a touch

weaker.

France has the largest budget deficit in the euro zone,

which is almost double the European Union's preferred limit of

3%.

Its problems take the shine off this year's European stocks

rally, which has been driven by increased spending on security

and infrastructure from the likes of Germany.

France's long-term finances were already vulnerable, and

politics has become increasingly unstable since Macron's

re-election in 2022, given the lack of any party, or grouping

holding a parliamentary majority.

Successive prime ministers - France has now had three in

under a year - have tried and failed to push through unpopular

budgets and on Monday, Lecornu's cost him his job.

"It certainly makes people wary about European assets at

this point because of the uncertainty and the spillover effects

that go from France just being unable to find its way out of

this malaise," IG Group chief market analyst Chris Beauchamp

said.

BORROWING COSTS SOAR

French bond prices dropped, pushing yields on benchmark

10-year debt up almost 9 basis points to around

3.59%. That left the premium investors demand to hold French

debt, rather than triple-A rated German paper, at

86.54 bps, the most since January this year.

This spread hit a 2012 high of 90 bps in last November.

Investors are worried about France's creditworthiness,

compounded by a ratings downgrade last month. On Monday, credit

default swaps - a derivative that reflects the cost of insuring

against a sovereign default - rose to 41 bps, the most since

April, up from 38 bps on Friday.

"The bigger question is how does this all resolve itself? " said

Pepperstone senior research strategist Michael Brown.

"Because there doesn't seem to be an obvious solution or obvious

silver bullet that we can look to to resolve it overnight."

(Additional reporting by Samuel Indyk, Lucy Raitano and Shashwat

Chauhan ; Editing by Andrew Cawthorne, Dhara Ranasinghe and Hugh

Lawson)