“Do you prefer Marmite debt over La Belle France?”
It’s a question posed by Marcus Ashworth in his Bloomberg Gadfly column today. Turns out that Unilever is regarded as more creditworthy than the French government. The company’s recently issued ten-year bond will pay you 1.03% interest, a bit less than the yield on ten-year French debt.
There are many technical reasons for this – all to do with the European Central Bank’s quantitative easing distorting eurozone bond markets.
But the other big problem is, of course, the looming French election – and what it might mean for French government debt…
The largest sovereign default ever
If National Front leader Marine Le Pen becomes French president in May, we could see the “world’s largest ever sovereign default”, reports the FT.
Why? Because the National Front wants to ditch the euro and return to the franc. To sweeten the idea, Le Pen has suggested that it would be little different to the situation in the lead-up to joining the euro.
You’d have two parallel currencies. The franc would be loosely tied to the euro – it would trade within a narrow band so that there was scope for devaluation where necessary. But it avoids the scary notion of having all of your savings redenominated into a free-floating, volatile currency overnight.
Sounds very reassuring.
The problem, say the credit rating agencies, is that the National Front would also like to redenominate about 80% of France’s public debt.
France owes about €2.trn. About €1.7trn of that was issued under French law. And according to David Rachline of the National Front, that means that lot could be redenominated. That would be great for France, because having its own currency “will allow us to do a competitive devaluation”.
Of course, that’s not something that global creditors would look kindly on. If I owe you money in pounds, and then I unilaterally decide to pay you in jelly beans, then you would probably feel that you were being cheated (although maybe that depends on the exact sterling to jellybeans exchange rate I decide to use).
This would, says the FT, having talked to various heads of credit ratings agencies, probably “amount to the largest sovereign default on record.”
Obviously, the National Front doesn’t give a flying fromage what the credit ratings agencies think. “They do not have much credibility after the financial crisis anyway.” And regardless of whatever else you might think of their policies, you have to grant them that point.
But of course, what’s good for France is not necessarily good for the rest of the world (I give you the Common Agricultural Policy). On top of the redenomination, you’d almost certainly have the collapse of the euro. If the second-most important country in the region pulls out, I struggle to see how you prevent the majority of the others from following suit.
In that scenario, I imagine you’d get Germany plus a few other countries sticking with a “hard” euro, and then the rest would probably follow a similar route to France – managed exchange rates against the euro. And pretty soon some of those would be forced into free floats.
Now, regardless of how much money printing is done by central banks, it’s hard to imagine a scenario in which that does not cause brutal, 2008-style market chaos.
Don’t get me wrong. It might well be for the best in the longer run – the euro is too inflexible. And while there are probably less disruptive paths to reform, it seems that the only route to change when things are run by committee, is via catastrophe.
But it wouldn’t be much fun.
Le Pen might not win this time around – but she won’t go away
What are the chances of this happening? They are low, presumably. I read an excellent explainer on the French electoral system by Robert Tombs (who wrote The English and their History) in The Spectator this week. It sums up nicely why Le Pen is unlikely to win. But it also explains why France is still in big trouble.
Put very simply, in the first round you vote for who you want to win, and in the second round, you vote for the candidate who frightens you the least. The idea is to prevent radical candidates from gaining power, thus protecting all the various special interest groups who benefit from things staying just the way they are.
The way Tombs explains it, there is almost a patriotic impulse to protect the system. He acknowledges that enough people might be so fed up with the status quo that this “Republican impulse” will fail to kick in. “Few now rule out a Le Pen victory completely.”
But chances are, he says, that Emmanuel Macron, the independent centrist candidate, would probably win instead. However, that will just put off the day of reckoning.
For a start, he’s keen on “liberal economic reforms likely to arouse widespread and even turbulent opposition”. So the French as a whole will take against him purely on that basis.
Meanwhile, all the people who did vote for Le Pen will merely double down. “She will probably get a higher vote than ever and will continue working inexorably towards the next election.”
Maybe we’ll get lucky. Maybe Francois Fillon will make a comeback, somehow live up to his “French Margaret Thatcher” billing, and take France down a steadier reform path at a pace it can handle, while wresting some control from the European authorities, and encouraging reform on that front too.
But that outcome sounds even less likely than that of a Le Pen victory.
One thing’s for sure – the significance to markets of Brexit is nothing compared to May’s second-round French election vote. We’ll be keeping a very close eye on developments.