Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. I'm Caroline Hepkat and
Speaker 1: this is Here's Why, where we take one new story
Speaker 1: and explain it in just a few minutes with our
Speaker 1: experts here at Bloomberg. French President Emanuey and Macon's surprised
Speaker 1: decision to call a snap parliamentary election has caused political
Speaker 1: chaos and spooks markets.
Speaker 2: The risks around politics are firmly back in focus.
Speaker 1: People are obviously going to see this as a very
Speaker 1: high risk strategy carneage.
Speaker 2: You've seen in the last week. You've seen in the
Speaker 2: stock market, the buying mar even the euro.
Speaker 1: Markets have said we'll sell first, we'll think second. French
Speaker 1: bonds have tumbled as the vote raises uncertainty over how
Speaker 1: the next government might address the country's public finances. Marine
Speaker 1: Le Penn's national rally is leading in the polls, and
Speaker 1: Emanuel Macon's finance minister, Bruno Lemaire has warned that the
Speaker 1: country could face its own Liz Trust scenario if the
Speaker 1: far right party wins, pointing to their previous policy pledges
Speaker 1: that would have cost around one hundred billion euros a year.
Speaker 1: The guilt market crisis here in the UK back in
Speaker 1: twenty twenty two under the former British Prime minister, has
Speaker 1: become a cautionary tail, it seems, for leaders elsewhere of
Speaker 1: testing the market's tolerance for bold ideas.
Speaker 2: Fitch, the rating agency, warning that the government's new plan
Speaker 2: could increase the nation's fiscal deficit. The government has been
Speaker 2: hit by a run on the pound and a financial
Speaker 2: crisis since the mini budget. We are seeing the UK
Speaker 2: bond market once again under pressure. Today we've got a
Speaker 2: confidence deficit, clarity deficit and credibility deficit.
Speaker 1: Investor is wearing some of the risks emanating from the
Speaker 1: debt crisis gripping the UK. So with that in mind,
Speaker 1: could it happen again in France? Well, here's why Europe's
Speaker 1: politicians should watch the bond markets. Are Managing editor for
Speaker 1: FX and Rates, Rachel Evans joins me now for more
Speaker 1: great to have you on? Was Bruno Lemaire being melodramatic?
Speaker 1: Quite interesting that he used Liz Trust as that caution retail.
Speaker 2: Yeah, I mean it certainly evokes a lot of memories
Speaker 2: from two years ago, and I think we have to
Speaker 2: remember this is all part of a political campaign. Inevitably,
Speaker 2: opponents are going to throw a bit of muder at
Speaker 2: each other, see what sticks and evoke the scariest thing
Speaker 2: that they can do, soje to try and kind of
Speaker 2: focus minds. But I think there is a sort of
Speaker 2: serious point behind those comments. The radidscianel has not laid
Speaker 2: out its economic platform yet, but some of the suggestions
Speaker 2: of what they could do and what they've talked about
Speaker 2: doing in the past, such as cutting taxes, blurring the
Speaker 2: retirement age, I mean, that would really cost an awful
Speaker 2: lot of money. And that's where the Liz Trust comparison
Speaker 2: kind of comes in, because of course Trust was well
Speaker 2: known now for coming out with these unfunded tax cuts
Speaker 2: that really spook to the market. And I think that's
Speaker 2: kind of the context in which these comments were made,
Speaker 2: that there is kind of that how do you pay
Speaker 2: for some of these commitments.
Speaker 1: The thing is, the UK's parliamentary system is very different
Speaker 1: from the presidential system in France. Even if Macran's party
Speaker 1: loses in the parliamentary election, he'll still be president. But
Speaker 1: then let's, you know, game out a scenario where it
Speaker 1: would be national rally. They would then perhaps hold the
Speaker 1: prime ministership in France, would they have enough power to
Speaker 1: make those big spending decisions.
Speaker 2: I think it depends a lot on the alliance that
Speaker 2: they're able to strike in the wake of the results.
Speaker 2: So depending on how well they do in these elections
Speaker 2: will determine the partners that they can draw on within
Speaker 2: kind of the parliamentary system. And if they have you know,
Speaker 2: a sufficient support, you know, then you could seize a
Speaker 2: prime minister coming through from that party. If they're in
Speaker 2: power in the parliament. I mean, they do have an
Speaker 2: awful lot of ability to dictate the terms of conversation,
Speaker 2: even if they don't necessarily have kind of the full
Speaker 2: power that the presidency has. But you know, they also
Speaker 2: have that democratic mandate and that's something that's very difficult
Speaker 2: to overlook. If you're coming back into parliament having the
Speaker 2: will of the people, as it were, behind you, then
Speaker 2: that's something that really from a sort of optics perspective,
Speaker 2: puts the pressure on to kind of accede to some
Speaker 2: of their suggestions on the policy side.
Speaker 1: Yeah, perhaps that carries weight. Mind you, France, how strong
Speaker 1: has the fiscal position been recently?
Speaker 2: Pretty bad, And I think that's one of the concerns
Speaker 2: for investors heading into this election. I mean, just at
Speaker 2: the end of last month, we saw a downgrade by
Speaker 2: SMP debted GDP. I was just looking at it. It's
Speaker 2: more than one hundred and ten percent at the moment.
Speaker 2: Not exactly great. But one of the real issues has
Speaker 2: been that with mccron losing his majority in the National Assembly,
Speaker 2: he's really struggled to tackle that. Some of the reformers
Speaker 2: that he's put forward have received an awful lot of
Speaker 2: very public pushback and that's made it very difficult for
Speaker 2: him to tackle. So I think that's where the bond
Speaker 2: market has kind of become very important. You're even kind
Speaker 2: of before this election, we were seeing French bonds underperforming
Speaker 2: versus their Spanish Italian peers, and since we've seen the
Speaker 2: election of volatility, you know, we've really seen kind of
Speaker 2: French bond yields blowing out and actually some of their
Speaker 2: debt yielding more than Portuguese, which is pretty significant when
Speaker 2: you think about where we were in the sovereign debt crisis.
Speaker 1: And how's the Liz Trust experienced sort of suffocated policy
Speaker 1: in Europe because again a bit like maybe not definitely
Speaker 1: not as severece the Greek crisis, but it has brought
Speaker 1: to the four again the danger of angering bond markets.
Speaker 2: Yeah, and they should be worried about that. We saw
Speaker 2: kind of, you know, the real perils of that under trust.
Speaker 2: You know, you saw the pound falling to a record low. Sure,
Speaker 2: record moves lower for guilts, So there's real reason to
Speaker 2: kind of worry. I think, you know, what we've seen
Speaker 2: in the last sort of a few years really is
Speaker 2: just because governments have had to borrow so much, you know,
Speaker 2: to kind of fund the recovery from the pandemic. They're
Speaker 2: in a vulnerable position, a more vulnerable position than perhaps
Speaker 2: they've been in numerous years, because they really do have
Speaker 2: to think about the stakeholders. And the stakeholders are not
Speaker 2: just their voters who want certain things and a certain
Speaker 2: quality of life, but the stakeholders are also bondholders, and
Speaker 2: they are the ones that are ultimately advancing the money
Speaker 2: to the government so that they can go forward with
Speaker 2: their spending plans. But their wants and desires also need
Speaker 2: to be taken into consideration, and what they want is
Speaker 2: to make sure that the government in charge is fiscally
Speaker 2: responsible and isn't diluting the worth of their debt by
Speaker 2: going out and borrowing aggressively.
Speaker 1: Rachel Evans are managing editor for FX and Rates. Thank
Speaker 1: you so much for joining me for more explanations like
Speaker 1: this one from our team of twenty seven hundred journalists
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Speaker 1: Caroline Hepgar. This is his why. We'll be back next
Speaker 1: week with more