WEBVTT - Lionel Laurent And Marcus Ashworth Talk France's Deepening Crisis 

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Well, look, let's start with Leonel's latest piece about this,

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<v Speaker 2>talking about Sebastiana Lecornu supposed to be Emmanuel Macro's last

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<v Speaker 2>chance man to keep his presidency on the rails through

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<v Speaker 2>twenty twenty seven. Is Sebastian Lecornuo going to be able

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<v Speaker 2>to do anything in the next forty eight hours that

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<v Speaker 2>he hasn't been able to do over the past monthly

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<v Speaker 2>and now?

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<v Speaker 1>Well, look, the new rule of French politics is it's

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<v Speaker 1>not over till it's over, but it feels over, it's

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<v Speaker 1>nearly over. The reason why I said that is because

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<v Speaker 1>I think that snap parliamentary elections, which has been something

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<v Speaker 1>that mac Colon's been trying to avoid ever since you

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<v Speaker 1>called the last one last year, that for me has

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<v Speaker 1>dramatically ramped up in probability, so that to meet us

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<v Speaker 1>like a very likely option. So what Mcorn's done is

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<v Speaker 1>basically put that on the table and said, okay, this

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<v Speaker 1>is basically happening, and you now have forty eight hours

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<v Speaker 1>to avoid that.

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<v Speaker 3>Okay.

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<v Speaker 1>So in other words, the divide mine of Parliament used

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<v Speaker 1>to be pro anti Macorn, willing to work with him

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<v Speaker 1>or not now Mackcorn wants wants the parliament to be

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<v Speaker 1>pro or anti snap elections. So basically all the parties

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<v Speaker 1>around Mackcorn, especially the center left, have to basically decide

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<v Speaker 1>are they going to risk their own jobs by letting

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<v Speaker 1>parliamentary elections happen, or are they going to have one last,

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<v Speaker 1>last last attempt at a coalition. But frankly, all of

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<v Speaker 1>the energy, all of the kind of gravity I feel,

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<v Speaker 1>is slipping away.

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<v Speaker 4>Our buyou, Marcus, let me bring you in here, because

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<v Speaker 4>we've got the oats bunch spread now eighty six basis points.

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<v Speaker 4>And what analysts keep telling me is this isn't a

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<v Speaker 4>crisis yet. So how much would it have to widen

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<v Speaker 4>for this actually to be considered a crisis in the

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<v Speaker 4>bond market?

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<v Speaker 3>A sharper move above one hundred would will concentrate some

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<v Speaker 3>some people for sure. You know, the point here is

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<v Speaker 3>that the ECB has some reserve weapons if it needs

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<v Speaker 3>to transmission for tect and incident, which has never been

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<v Speaker 3>tested and won't be under these circumstances. So you know,

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<v Speaker 3>France is sort of on its own here, But of

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<v Speaker 3>course it's not because we've seen over over all these

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<v Speaker 3>various different blips. You can go back to the snap

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<v Speaker 3>election last year, last sort of June, that really the

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<v Speaker 3>cavalry gets you know, the wagons get circled and Europe

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<v Speaker 3>comes into at least soften the blows. So yes, the

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<v Speaker 3>ECB no longer in theory is doing you know, quantitated buying.

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<v Speaker 3>It's slightly letting some passive aggressive excuse me, my pun

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<v Speaker 3>you know, drift off. But it's not there to actively

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<v Speaker 3>step in and bail out France. But if you look

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<v Speaker 3>at the yields versus Italy, they've not ever so slightly above.

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<v Speaker 3>But this is this is micro, real small stuff at

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<v Speaker 3>the moment, it's just that why buy France? That's your answer.

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<v Speaker 3>You're not getting any new money in if in doubt

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<v Speaker 3>you're going to you know, if a bomb matures or

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<v Speaker 3>you've got a better opportion, you're going to slide out

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<v Speaker 3>of France. And that's where it's a slow gradual.

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<v Speaker 2>Liel I mean on that question of why by France.

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<v Speaker 2>The conversation that we've had with Jean del Bartrom Blueberg

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<v Speaker 2>Economics and plenty of others over the past couple of

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<v Speaker 2>days has been this isn't a fiscal crisis yet, This

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<v Speaker 2>is a political crisis, and realistically nothing's really changed in

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<v Speaker 2>the past, probably since Vonso Beru, perhaps since Michelle Barney,

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<v Speaker 2>and nothing's really changed either. They'll figure it out in

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<v Speaker 2>the end. What changes in that dynamic? Where does this

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<v Speaker 2>Where do we get to the end of the road

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<v Speaker 2>of sort of the gallic shrug.

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<v Speaker 1>Well, I think, as Marcus was hinting, you know, I've

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<v Speaker 1>called France look big short, right. It is a big

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<v Speaker 1>short on a relative basis because the political crisis is

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<v Speaker 1>unfolding very slowly and everyone can see what's happening, and

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<v Speaker 1>you can and you can model it out longer term.

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<v Speaker 1>I think this is a political risk story in that

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<v Speaker 1>an election changes a lot, and Marie Leupenn and her

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<v Speaker 1>number two, Sean Don Baldella, are the politicians to beat.

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<v Speaker 1>Now the two big questions that the two planks of

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<v Speaker 1>Macaul's legacy so far have been stable tax policy and

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<v Speaker 1>an economic policy in France that is predictable, and pension

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<v Speaker 1>reform and a general reform agenda. Those two things have

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<v Speaker 1>been rewarded by investors over the past decade. Those two

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<v Speaker 1>things are starting to crack because, as we've discussed, all

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<v Speaker 1>the parties around him, especially on the far left on

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<v Speaker 1>the far right want to brush those away. They do

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<v Speaker 1>not want stable taxation, they want more budget freebies, and

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<v Speaker 1>they want to roll back pension reform. Those are the

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<v Speaker 1>things that I think really could derail the French story

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<v Speaker 1>even further, because then you get back into the old France,

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<v Speaker 1>the pre macroorn France, but with a lot more debt

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<v Speaker 1>and a lot worse budget deficit, which I think spooks

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<v Speaker 1>European partners a bit more.

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<v Speaker 2>Just on the politics, two of Macron's closest allies have

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<v Speaker 2>started to disown him, essentially Edward Philip, who okay had

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<v Speaker 2>gone and set up his own shop, but was still

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<v Speaker 2>a friend to a man your Macron, Gabriel Latal, the

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<v Speaker 2>head of Macron's own party, saying on television last night

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<v Speaker 2>she doesn't understand the president's decisions anymore. Is everyone now

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<v Speaker 2>just positioning themselves with the next set of elections and

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<v Speaker 2>trying to diss them someselves for Macra.

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<v Speaker 1>Totally totally, and that's completely logical, and backhor himself betrayed

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<v Speaker 1>his predecessor, fran Solon, his father figure. This is the

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<v Speaker 1>rule of French politics. I think what slightly new, I

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<v Speaker 1>guess is that edwar Philippe been calling for a new

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<v Speaker 1>presidential election, is really willing to get out there and

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<v Speaker 1>say let's make history again. It's a kind of daunting proposition.

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<v Speaker 1>I think he's now concerned that Marie Lepenn is the

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<v Speaker 1>politician to be even in a presidential election. Edwar Philippe

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<v Speaker 1>had been groomed as the kind of potential heir of Macon.

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<v Speaker 1>I think polls are quite alarming in the sense that

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<v Speaker 1>they're showing, whether it's La Penn or her number two Bardella,

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<v Speaker 1>they're really comfortably in the lead for a presidential election.

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<v Speaker 1>So you can see there's a lot more panic, there's

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<v Speaker 1>a lot more fabrility. People are willing to push the

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<v Speaker 1>boat out a little more in terms of radical proposals,

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<v Speaker 1>and I think a macun resignation would be a huge

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<v Speaker 1>bombshell and I think definitely pushed the spread two levels

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<v Speaker 1>that Marcus was flagging.

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<v Speaker 4>Marcus, what does the market think of the far right

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<v Speaker 4>in France?

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<v Speaker 3>Well, I think in essence it's it's one of these misnowners,

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<v Speaker 3>is that the media portrays these you know, La Penn

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<v Speaker 3>and her crews as far right, but in practice that

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<v Speaker 3>they're very far left. In socialistic terms as an economic

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<v Speaker 3>point of view, leaving some of the politics out of it.

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<v Speaker 3>This would be no, maybe not quite as sort of

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<v Speaker 3>Jean Luke Meler chanp you know, cryptocommunists, but it's pretty

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<v Speaker 3>close to it. And that would be you know, as

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<v Speaker 3>lean I was very carefully pointed out on the various

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<v Speaker 3>different flagships of the macaron era would be thrown out

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<v Speaker 3>where we would be talking, you know, it would be

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<v Speaker 3>very I'm sure friendly towards a wealth tax and indeed,

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<v Speaker 3>of course running back that that pension reform which has

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<v Speaker 3>been so so expensive to get it through and and

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<v Speaker 3>so you know, important pivotal I think for how the

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<v Speaker 3>markets view French debt. So this really is this tactic

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<v Speaker 3>of of Macaroni again is with this snap election last

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<v Speaker 3>year and again threatening elections, it's to try and scare

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<v Speaker 3>the National Assembly into doing what he wants. Let's hope

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<v Speaker 3>that that there's something comes out this which is sensible

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<v Speaker 3>and a government can be formed. I mean, if nothing happens,

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<v Speaker 3>if then stands water, actually the budget deficit will improve.

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<v Speaker 3>But the question really is is that where it's twenty

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<v Speaker 3>twenty seven and the president's collection all before that, if

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<v Speaker 3>we do get either a hard left or indeed the

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<v Speaker 3>the pen socialism version, that the France is going to

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<v Speaker 3>be in a very different, painful world. Mostly the market

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<v Speaker 3>expects it's not to happen, and at the moment that's

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<v Speaker 3>why we're only inching slightly high.

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<v Speaker 2>Can we put to bed comparisons to the Liz trus

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<v Speaker 2>era when we think about the situation looking at France

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<v Speaker 2>todaily now.

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<v Speaker 1>Well, I think Liz trusts and breaksit are kind of

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<v Speaker 1>useful barometers of what happens when a country sort of

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<v Speaker 1>tests its reputation and long held perceptions from the market. Basically,

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<v Speaker 1>I think, as Marcus has said, the ECB is there,

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<v Speaker 1>the euro is there, Okay, France is too big to fail.

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<v Speaker 1>So I think that there will be a question of okay,

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<v Speaker 1>if there's a staring match between Frankfurt and Berlin and Paris,

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<v Speaker 1>who's going to move first? But I think trust is

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<v Speaker 1>frankly a useful reminder not to take things too far.

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<v Speaker 1>And I am concerned that if the politics gets more

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<v Speaker 1>radical and le Penn becomes a little less mainstream and

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<v Speaker 1>her number two decides to go a bit more radical

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<v Speaker 1>as well on issues like pensions and taxation, you could

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<v Speaker 1>get a much worse economic situation over the next few years,

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<v Speaker 1>and you could end up with something approaching a trust moment,

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<v Speaker 1>even if it's not exactly the same. So I don't

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<v Speaker 1>think you could put it entirely to bed Marcus.

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<v Speaker 4>Is the other ingredient for this to turn into a

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<v Speaker 4>trust situation that there needs to be a structural idiosyncrasy

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<v Speaker 4>in the French bond market like we had with LDI

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<v Speaker 4>in the UK.

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<v Speaker 3>Good question, No, I mean there is something you know

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<v Speaker 3>going on at the moment in Holland and their pension system,

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<v Speaker 3>but not so much in France, where the breakdown comes

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<v Speaker 3>is used to be called bund plus, whereby particularly Japanese

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<v Speaker 3>investors would happily buy French debt, which is, you know,

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<v Speaker 3>larger than even the Italian in scale, believing they were

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<v Speaker 3>getting the equivalent of of you know, bunt security of

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<v Speaker 3>German sort of type stuff, but with an extra spread.

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<v Speaker 3>That trade, as I said, no longer happens. That's where

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<v Speaker 3>you get the sort of you know, no longer are

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<v Speaker 3>interested in France, You avoid France. It's not much you

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<v Speaker 3>actively sell, you just don't put any more money. And

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<v Speaker 3>when stuff matures you don't reinvest it, and that is

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<v Speaker 3>you know, I think where we have a situation if

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<v Speaker 3>we do get France downgraded by a second or third

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<v Speaker 3>rating agency. We've obviously seen Fitch, but we've of course

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<v Speaker 3>in the next two or three months leading up into

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<v Speaker 3>the end of the year. And also they have this

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<v Speaker 3>excess definite procedure they have to get through Brussels that

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<v Speaker 3>you might see that some of the index bond funds

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<v Speaker 3>have to start selling because France is no longer sufficiently

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<v Speaker 3>rated double A and slips down. So that's one one

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<v Speaker 3>potential thing, but that again will be very much a

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<v Speaker 3>slow burn. I think we'll see that coming from quite

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<v Speaker 3>a long while way away.

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<v Speaker 2>Yeah, can you just give us a sense to wrap

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<v Speaker 2>up this conversation of where the French public are in

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<v Speaker 2>all of this as well? I do get the impression

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<v Speaker 2>from the limits of conversations I have everyone's just a

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<v Speaker 2>bit sick of us. Is that a fair assessment?

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<v Speaker 3>Yeah?

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<v Speaker 1>Sick, tired, disgusted, fed up, whatever you want, whatever adjective

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<v Speaker 1>you want. The thing is that there's always there's always

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<v Speaker 1>a there's two potential outcomes, right, Either France becomes a

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<v Speaker 1>country almost like the Netherlands, or other countries where the

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<v Speaker 1>politics is crazy, but somehow people carry on, businesses carry on,

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<v Speaker 1>the economy carries on. We've seen a bit of that,

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<v Speaker 1>or my concern is that we get much much worse

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<v Speaker 1>to come. There seems to be a nihilistic, almost nihilistic

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<v Speaker 1>view in society, huge distrust of politicians, loss of faith

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<v Speaker 1>in policy discussed almost with the political class, and that

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<v Speaker 1>I think is very dangerous for the future.

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<v Speaker 2>And just in the short term. What do you think

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<v Speaker 2>is going to happen this week?

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<v Speaker 1>I think mc horn is going to keep doing these

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<v Speaker 1>kind of hail Mary Moose, But as I said, I

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<v Speaker 1>do think parliamentary elections are the most likely outcome, if

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<v Speaker 1>not the end of this year, in the studd of

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<v Speaker 1>next year.

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<v Speaker 2>Okay, Leonella right here with me in Paris and Bloomberg Opinion,

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<v Speaker 2>Marcus Ashworth joining us as well. Thank you to you

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<v Speaker 2>both for talking us through the various aspects of this

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<v Speaker 2>unfolding crisis. You can read the latest from both Marcus

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<v Speaker 2>and Leonelle at Bloomberg dot com, Forward Slash Opinion