LONDON, March 16 Investors looking through the fog of French election campaign rhetoric see enough differences between the two main presidential contenders to care who wins.
Protectionism, potshots at European Union rules and promises to raise taxes on the rich are as much a part of the platform of conservative incumbent Nicolas Sarkozy as his Socialist rival Francois Hollande.
While this is the norm for French election campaigns, some of the pledges being bandied around matter to financial markets.
Most notably, Hollande has said he wants to amend a European fiscal discipline pact on which the ink is barely dry, and which Germany views as the quid pro quo for a European "firewall" that will be vital if the debt crisis flares up again.
And some of Hollande's domestic policy pledges, such as his plan to reverse an increase in the pension age for those who have worked since the age of 18, are being viewed as a signal that fiscal and economic reforms would be implemented even more slowly under Hollande than they were under Sarkozy.
"The French election matters more than it usually does," Giordano Lombardo, group chief investment officer at Pioneer Investments, which has 180 billion euros ($235.3 billion) under management, said.
"You must distinguish between political campaigning and actual policies and therefore be cautious of bold statements during political campaigns. But the market has been a bit complacent and this (election) is worthy of attention."
Lombardo said Pioneer's holdings of French government bonds were neutral, so it was holding neither more nor less than it was supposed to given the benchmarks it sets itself. What would it take to make him reduce these holdings?
"I would need to see, for example, follow-through on the reversal of pension reforms, or additional unfunded spending."
SHOOT FIRST, QUESTIONS LATER?
Whether it is due to complacency, caution, or just the flood of ECB's cheap three-year loans, financial markets have yet to flag concern about an election which polls suggest Hollande will win in a second-round runoff on May 6.
The premium that investors demand to hold French 10-year government bonds rather than German has halved since mid-November to less than 1 percentage point, and insurance against the risk of French default has become cheaper.
Moreover, the French stock market has risen nearly 14 percent so far this year, outperforming the pan-European market, though not the German.
Nor is there any evidence of a flight out of French assets, according to Bank of New York Mellon data on client fund flows - if anything, the opposite is true.
"We have seen fairly steady inflows into the French bond market since the start of February, though it has paused more recently. And it is the same picture on the equity side," Neil Mellor, strategist at Bank of New York Mellon, said.
But whether or not prices are moving yet, investors are definitely interested, according to the banks they consult.
"There is a lot of interest in the French elections in the international investment community, especially in the U.S. and Asia," Jacques Cailloux, head of European economics at RBS, said.
"There is concern about the headlines on pension reform, fiscal positioning and the attitude on the fiscal compact," Cailloux said. "Given the level of interest, markets may decide to shoot first and ask questions later. I would not be surprised if some investors positioned themselves by buying French CDS," he added, referring to credit default swaps, which offer default protection.
REASONS TO CARE
The reason investors are concerned about those headlines is that they care about anything which might make France's long-term fiscal position less sustainable, compound the loss of international competitiveness that feeds its current account deficit, or holds back economic activity.
"Does it (the French bond yield) look like a fantastic deal? No. There is announcement risk and at current spreads, there is no great value in chasing France," Luca Jellinek, Credit Agricole's head of European rates strategy, said.
"I don't perceive any great urgency (for reforms). And rolling back the modest extension of the pension age would not be perceived positively by the market."
But analysts who want France to undertake more reforms are aware that they need to take account of the French legislative elections in June, especially if Hollande proves to be a closet reformer as some believe him to be.
Cailloux at RBS noted the risk that Sarkozy could end up co-habiting with a parliament which has a Socialist majority, resulting in a stalemate on reforms. "The question is, if you have Sarkozy with no majority in parliament, is it less effective than Hollande with a majority?"
Investors are also following the French election closely because of the pivotal role that French and German leaders have played in managing the euro zone crisis in the past couple of years, and which they may be called on to play again.
For one thing, Hollande's stance on the new European fiscal pact is looking less and less isolated.
Spain has already violated the spirit of the pact by revising its budget deficit target. Dutch Labour deputies are threatening to block it unless the Netherlands is allowed more time to comply with the deficit limit of 3 percent of gross domestic product. And Ireland is to hold a referendum on the pact.
Anything that undermines a pact which Chancellor Angela Merkel is using to convince German voters that Berlin is not just a cash cow for highly indebted peripheral countries could spell trouble for the euro zone and for financial markets.
"What started as a second-order issue for Hollande may become more central, and that would slow down the process of approving the fiscal compact and could have an impact on getting approval of the ESM (European Stability Mechanism)," said Gilles Moec, co-head of European economic research at Deutsche Bank.
"If we were back where we were three months ago, with a pressing need for a massive firewall, any time wasting on a Franco-German dispute would be very disruptive."