By Yoruk Bahceli

June 25 (Reuters) - For investors in France, a left-wing

alliance could be a bigger risk than a far-right leadership,

some analysts say.

President Emmanuel Macron's shock decision to call

parliamentary elections this month and Marine Le Pen's far-right

National Rally (RN) leading the polls have exacerbated concerns

about France's fiscal sustainability.

The spread French debt pays over Germany surged

and shares in French banks and companies

slumped in the days after the election was announced. The

selloff has eased but assets are far from recovering.

Spending plans by the leftist New Popular Front (NFP)

alliance, which is polling second behind the RN, have added to

those fiscal worries.

Some investors and analysts now say the risk that the NFP

may perform better than expected in the second election round on

July 7 due to tactical voting, and even form part of a new

government, may be a bigger worry for financial markets.

"The worst outcome for the market would be if the left wing

would get in with the majority... that's the tail risk," said

Gareth Hill, a portfolio manager at Royal London Asset

Management.

The NFP wants to progressively ramp up spending to an extra

150 billion euros ($160.44 billion) annually by 2027 to cover

policies ranging from a 10% civil servant pay rise this year to

cutting the retirement age to 60 from 64 currently.

It says the spending would be fully offset by hikes on taxes

ranging from inheritance to wealth and multinational

corporations.

While the NFP would not increase France's budget deficit if

able to form a government, it also wouldn't reduce it, an

official said last week.

That's a worry for investors. France's deficit was at 5.5%

of output last year - far above the European Union's 3% limit -

already prompting the EU executive to recommend disciplinary

steps.

In contrast, the far-right RN's financial pointman

Jean-Philippe Tanguy told Reuters in an interview published on

Monday that the party won't "let the deficit run out of control"

and would retain current plans to reduce it to 3% by 2027 to

respect EU rules. It has also pledged an audit of public

finances.

While it remained to be seen what it would do if in

government, the RN at least speaking of fiscal responsibility is

"reassuring", said Hill at Royal London Asset Management.

NEGATIVE FOR THE EURO

There's no doubt the RN's costly plans have spooked markets.

They include cutting value-added tax on energy and lowering the

retirement age to 60 for workers, though the party now says that

would only apply to those who started working before the age of

20. It says the cost of its plans can be offset by cutting red

tape, closing tax loopholes and reducing welfare spending

benefiting immigrants.

Yet, compared to an NFP lead, an RN majority would be

welcomed by financial markets, economists at Nomura said in a

note distributed on Tuesday.

"In our view, NFP forming the government, whether outright

or as a minority, would be most adverse for financial markets

and result in (French-German bond) spreads widening further,"

they wrote, adding it would also be negative for the euro

.

"In many ways, the NFP is openly rejecting the institutions

that govern fiscal prudence, akin to the UK's Liz Truss," Nomura

wrote, referring to the former British Prime Minister's unfunded

tax cuts that led to a UK government bond rout in 2022.

Economists at investment bank Jefferies said a left-wing

government would be the "worst outcome" for markets if it was

the result of Jean-Luc Melenchon's far-left France Unbowed

party, part of the NFP, doing well and prompting a far-left

policy agenda.

"We could see increased clashes with the EU," Jefferies

wrote, expecting the French spread over Germany - currently

around 70 basis points - to widen to as much as 120 in such a

scenario, assigning it a 20-25% chance.

"The negative reaction in the market could last longer, and

it's not obvious to us that this scenario would be consistent

with a buy the dip view," they wrote, a position they recommend

for most other scenarios including an RN absolute majority.

($1 = 0.9349 euros)