Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Well, look, let's start with Leonel's latest piece about this,
Speaker 2: talking about Sebastiana Lecornu supposed to be Emmanuel Macro's last
Speaker 2: chance man to keep his presidency on the rails through
Speaker 2: twenty twenty seven. Is Sebastian Lecornuo going to be able
Speaker 2: to do anything in the next forty eight hours that
Speaker 2: he hasn't been able to do over the past monthly
Speaker 2: and now?
Speaker 1: Well, look, the new rule of French politics is it's
Speaker 1: not over till it's over, but it feels over, it's
Speaker 1: nearly over. The reason why I said that is because
Speaker 1: I think that snap parliamentary elections, which has been something
Speaker 1: that mac Colon's been trying to avoid ever since you
Speaker 1: called the last one last year, that for me has
Speaker 1: dramatically ramped up in probability, so that to meet us
Speaker 1: like a very likely option. So what Mcorn's done is
Speaker 1: basically put that on the table and said, okay, this
Speaker 1: is basically happening, and you now have forty eight hours
Speaker 1: to avoid that.
Speaker 3: Okay.
Speaker 1: So in other words, the divide mine of Parliament used
Speaker 1: to be pro anti Macorn, willing to work with him
Speaker 1: or not now Mackcorn wants wants the parliament to be
Speaker 1: pro or anti snap elections. So basically all the parties
Speaker 1: around Mackcorn, especially the center left, have to basically decide
Speaker 1: are they going to risk their own jobs by letting
Speaker 1: parliamentary elections happen, or are they going to have one last,
Speaker 1: last last attempt at a coalition. But frankly, all of
Speaker 1: the energy, all of the kind of gravity I feel,
Speaker 1: is slipping away.
Speaker 4: Our buyou, Marcus, let me bring you in here, because
Speaker 4: we've got the oats bunch spread now eighty six basis points.
Speaker 4: And what analysts keep telling me is this isn't a
Speaker 4: crisis yet. So how much would it have to widen
Speaker 4: for this actually to be considered a crisis in the
Speaker 4: bond market?
Speaker 3: A sharper move above one hundred would will concentrate some
Speaker 3: some people for sure. You know, the point here is
Speaker 3: that the ECB has some reserve weapons if it needs
Speaker 3: to transmission for tect and incident, which has never been
Speaker 3: tested and won't be under these circumstances. So you know,
Speaker 3: France is sort of on its own here, But of
Speaker 3: course it's not because we've seen over over all these
Speaker 3: various different blips. You can go back to the snap
Speaker 3: election last year, last sort of June, that really the
Speaker 3: cavalry gets you know, the wagons get circled and Europe
Speaker 3: comes into at least soften the blows. So yes, the
Speaker 3: ECB no longer in theory is doing you know, quantitated buying.
Speaker 3: It's slightly letting some passive aggressive excuse me, my pun
Speaker 3: you know, drift off. But it's not there to actively
Speaker 3: step in and bail out France. But if you look
Speaker 3: at the yields versus Italy, they've not ever so slightly above.
Speaker 3: But this is this is micro, real small stuff at
Speaker 3: the moment, it's just that why buy France? That's your answer.
Speaker 3: You're not getting any new money in if in doubt
Speaker 3: you're going to you know, if a bomb matures or
Speaker 3: you've got a better opportion, you're going to slide out
Speaker 3: of France. And that's where it's a slow gradual.
Speaker 2: Liel I mean on that question of why by France.
Speaker 2: The conversation that we've had with Jean del Bartrom Blueberg
Speaker 2: Economics and plenty of others over the past couple of
Speaker 2: days has been this isn't a fiscal crisis yet, This
Speaker 2: is a political crisis, and realistically nothing's really changed in
Speaker 2: the past, probably since Vonso Beru, perhaps since Michelle Barney,
Speaker 2: and nothing's really changed either. They'll figure it out in
Speaker 2: the end. What changes in that dynamic? Where does this
Speaker 2: Where do we get to the end of the road
Speaker 2: of sort of the gallic shrug.
Speaker 1: Well, I think, as Marcus was hinting, you know, I've
Speaker 1: called France look big short, right. It is a big
Speaker 1: short on a relative basis because the political crisis is
Speaker 1: unfolding very slowly and everyone can see what's happening, and
Speaker 1: you can and you can model it out longer term.
Speaker 1: I think this is a political risk story in that
Speaker 1: an election changes a lot, and Marie Leupenn and her
Speaker 1: number two, Sean Don Baldella, are the politicians to beat.
Speaker 1: Now the two big questions that the two planks of
Speaker 1: Macaul's legacy so far have been stable tax policy and
Speaker 1: an economic policy in France that is predictable, and pension
Speaker 1: reform and a general reform agenda. Those two things have
Speaker 1: been rewarded by investors over the past decade. Those two
Speaker 1: things are starting to crack because, as we've discussed, all
Speaker 1: the parties around him, especially on the far left on
Speaker 1: the far right want to brush those away. They do
Speaker 1: not want stable taxation, they want more budget freebies, and
Speaker 1: they want to roll back pension reform. Those are the
Speaker 1: things that I think really could derail the French story
Speaker 1: even further, because then you get back into the old France,
Speaker 1: the pre macroorn France, but with a lot more debt
Speaker 1: and a lot worse budget deficit, which I think spooks
Speaker 1: European partners a bit more.
Speaker 2: Just on the politics, two of Macron's closest allies have
Speaker 2: started to disown him, essentially Edward Philip, who okay had
Speaker 2: gone and set up his own shop, but was still
Speaker 2: a friend to a man your Macron, Gabriel Latal, the
Speaker 2: head of Macron's own party, saying on television last night
Speaker 2: she doesn't understand the president's decisions anymore. Is everyone now
Speaker 2: just positioning themselves with the next set of elections and
Speaker 2: trying to diss them someselves for Macra.
Speaker 1: Totally totally, and that's completely logical, and backhor himself betrayed
Speaker 1: his predecessor, fran Solon, his father figure. This is the
Speaker 1: rule of French politics. I think what slightly new, I
Speaker 1: guess is that edwar Philippe been calling for a new
Speaker 1: presidential election, is really willing to get out there and
Speaker 1: say let's make history again. It's a kind of daunting proposition.
Speaker 1: I think he's now concerned that Marie Lepenn is the
Speaker 1: politician to be even in a presidential election. Edwar Philippe
Speaker 1: had been groomed as the kind of potential heir of Macon.
Speaker 1: I think polls are quite alarming in the sense that
Speaker 1: they're showing, whether it's La Penn or her number two Bardella,
Speaker 1: they're really comfortably in the lead for a presidential election.
Speaker 1: So you can see there's a lot more panic, there's
Speaker 1: a lot more fabrility. People are willing to push the
Speaker 1: boat out a little more in terms of radical proposals,
Speaker 1: and I think a macun resignation would be a huge
Speaker 1: bombshell and I think definitely pushed the spread two levels
Speaker 1: that Marcus was flagging.
Speaker 4: Marcus, what does the market think of the far right
Speaker 4: in France?
Speaker 3: Well, I think in essence it's it's one of these misnowners,
Speaker 3: is that the media portrays these you know, La Penn
Speaker 3: and her crews as far right, but in practice that
Speaker 3: they're very far left. In socialistic terms as an economic
Speaker 3: point of view, leaving some of the politics out of it.
Speaker 3: This would be no, maybe not quite as sort of
Speaker 3: Jean Luke Meler chanp you know, cryptocommunists, but it's pretty
Speaker 3: close to it. And that would be you know, as
Speaker 3: lean I was very carefully pointed out on the various
Speaker 3: different flagships of the macaron era would be thrown out
Speaker 3: where we would be talking, you know, it would be
Speaker 3: very I'm sure friendly towards a wealth tax and indeed,
Speaker 3: of course running back that that pension reform which has
Speaker 3: been so so expensive to get it through and and
Speaker 3: so you know, important pivotal I think for how the
Speaker 3: markets view French debt. So this really is this tactic
Speaker 3: of of Macaroni again is with this snap election last
Speaker 3: year and again threatening elections, it's to try and scare
Speaker 3: the National Assembly into doing what he wants. Let's hope
Speaker 3: that that there's something comes out this which is sensible
Speaker 3: and a government can be formed. I mean, if nothing happens,
Speaker 3: if then stands water, actually the budget deficit will improve.
Speaker 3: But the question really is is that where it's twenty
Speaker 3: twenty seven and the president's collection all before that, if
Speaker 3: we do get either a hard left or indeed the
Speaker 3: the pen socialism version, that the France is going to
Speaker 3: be in a very different, painful world. Mostly the market
Speaker 3: expects it's not to happen, and at the moment that's
Speaker 3: why we're only inching slightly high.
Speaker 2: Can we put to bed comparisons to the Liz trus
Speaker 2: era when we think about the situation looking at France
Speaker 2: todaily now.
Speaker 1: Well, I think Liz trusts and breaksit are kind of
Speaker 1: useful barometers of what happens when a country sort of
Speaker 1: tests its reputation and long held perceptions from the market. Basically,
Speaker 1: I think, as Marcus has said, the ECB is there,
Speaker 1: the euro is there, Okay, France is too big to fail.
Speaker 1: So I think that there will be a question of okay,
Speaker 1: if there's a staring match between Frankfurt and Berlin and Paris,
Speaker 1: who's going to move first? But I think trust is
Speaker 1: frankly a useful reminder not to take things too far.
Speaker 1: And I am concerned that if the politics gets more
Speaker 1: radical and le Penn becomes a little less mainstream and
Speaker 1: her number two decides to go a bit more radical
Speaker 1: as well on issues like pensions and taxation, you could
Speaker 1: get a much worse economic situation over the next few years,
Speaker 1: and you could end up with something approaching a trust moment,
Speaker 1: even if it's not exactly the same. So I don't
Speaker 1: think you could put it entirely to bed Marcus.
Speaker 4: Is the other ingredient for this to turn into a
Speaker 4: trust situation that there needs to be a structural idiosyncrasy
Speaker 4: in the French bond market like we had with LDI
Speaker 4: in the UK.
Speaker 3: Good question, No, I mean there is something you know
Speaker 3: going on at the moment in Holland and their pension system,
Speaker 3: but not so much in France, where the breakdown comes
Speaker 3: is used to be called bund plus, whereby particularly Japanese
Speaker 3: investors would happily buy French debt, which is, you know,
Speaker 3: larger than even the Italian in scale, believing they were
Speaker 3: getting the equivalent of of you know, bunt security of
Speaker 3: German sort of type stuff, but with an extra spread.
Speaker 3: That trade, as I said, no longer happens. That's where
Speaker 3: you get the sort of you know, no longer are
Speaker 3: interested in France, You avoid France. It's not much you
Speaker 3: actively sell, you just don't put any more money. And
Speaker 3: when stuff matures you don't reinvest it, and that is
Speaker 3: you know, I think where we have a situation if
Speaker 3: we do get France downgraded by a second or third
Speaker 3: rating agency. We've obviously seen Fitch, but we've of course
Speaker 3: in the next two or three months leading up into
Speaker 3: the end of the year. And also they have this
Speaker 3: excess definite procedure they have to get through Brussels that
Speaker 3: you might see that some of the index bond funds
Speaker 3: have to start selling because France is no longer sufficiently
Speaker 3: rated double A and slips down. So that's one one
Speaker 3: potential thing, but that again will be very much a
Speaker 3: slow burn. I think we'll see that coming from quite
Speaker 3: a long while way away.
Speaker 2: Yeah, can you just give us a sense to wrap
Speaker 2: up this conversation of where the French public are in
Speaker 2: all of this as well? I do get the impression
Speaker 2: from the limits of conversations I have everyone's just a
Speaker 2: bit sick of us. Is that a fair assessment?
Speaker 3: Yeah?
Speaker 1: Sick, tired, disgusted, fed up, whatever you want, whatever adjective
Speaker 1: you want. The thing is that there's always there's always
Speaker 1: a there's two potential outcomes, right, Either France becomes a
Speaker 1: country almost like the Netherlands, or other countries where the
Speaker 1: politics is crazy, but somehow people carry on, businesses carry on,
Speaker 1: the economy carries on. We've seen a bit of that,
Speaker 1: or my concern is that we get much much worse
Speaker 1: to come. There seems to be a nihilistic, almost nihilistic
Speaker 1: view in society, huge distrust of politicians, loss of faith
Speaker 1: in policy discussed almost with the political class, and that
Speaker 1: I think is very dangerous for the future.
Speaker 2: And just in the short term. What do you think
Speaker 2: is going to happen this week?
Speaker 1: I think mc horn is going to keep doing these
Speaker 1: kind of hail Mary Moose, But as I said, I
Speaker 1: do think parliamentary elections are the most likely outcome, if
Speaker 1: not the end of this year, in the studd of
Speaker 1: next year.
Speaker 2: Okay, Leonella right here with me in Paris and Bloomberg Opinion,
Speaker 2: Marcus Ashworth joining us as well. Thank you to you
Speaker 2: both for talking us through the various aspects of this
Speaker 2: unfolding crisis. You can read the latest from both Marcus
Speaker 2: and Leonelle at Bloomberg dot com, Forward Slash Opinion