WEBVTT - Here's Why Europe's Politicians Should Watch the Bond Markets

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News. I'm Caroline Hepkat and

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<v Speaker 1>this is Here's Why, where we take one new story

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<v Speaker 1>and explain it in just a few minutes with our

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<v Speaker 1>experts here at Bloomberg. French President Emanuey and Macon's surprised

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<v Speaker 1>decision to call a snap parliamentary election has caused political

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<v Speaker 1>chaos and spooks markets.

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<v Speaker 2>The risks around politics are firmly back in focus.

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<v Speaker 1>People are obviously going to see this as a very

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<v Speaker 1>high risk strategy carneage.

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<v Speaker 2>You've seen in the last week. You've seen in the

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<v Speaker 2>stock market, the buying mar even the euro.

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<v Speaker 1>Markets have said we'll sell first, we'll think second. French

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<v Speaker 1>bonds have tumbled as the vote raises uncertainty over how

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<v Speaker 1>the next government might address the country's public finances. Marine

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<v Speaker 1>Le Penn's national rally is leading in the polls, and

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<v Speaker 1>Emanuel Macon's finance minister, Bruno Lemaire has warned that the

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<v Speaker 1>country could face its own Liz Trust scenario if the

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<v Speaker 1>far right party wins, pointing to their previous policy pledges

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<v Speaker 1>that would have cost around one hundred billion euros a year.

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<v Speaker 1>The guilt market crisis here in the UK back in

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<v Speaker 1>twenty twenty two under the former British Prime minister, has

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<v Speaker 1>become a cautionary tail, it seems, for leaders elsewhere of

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<v Speaker 1>testing the market's tolerance for bold ideas.

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<v Speaker 2>Fitch, the rating agency, warning that the government's new plan

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<v Speaker 2>could increase the nation's fiscal deficit. The government has been

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<v Speaker 2>hit by a run on the pound and a financial

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<v Speaker 2>crisis since the mini budget. We are seeing the UK

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<v Speaker 2>bond market once again under pressure. Today we've got a

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<v Speaker 2>confidence deficit, clarity deficit and credibility deficit.

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<v Speaker 1>Investor is wearing some of the risks emanating from the

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<v Speaker 1>debt crisis gripping the UK. So with that in mind,

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<v Speaker 1>could it happen again in France? Well, here's why Europe's

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<v Speaker 1>politicians should watch the bond markets. Are Managing editor for

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<v Speaker 1>FX and Rates, Rachel Evans joins me now for more

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<v Speaker 1>great to have you on? Was Bruno Lemaire being melodramatic?

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<v Speaker 1>Quite interesting that he used Liz Trust as that caution retail.

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<v Speaker 2>Yeah, I mean it certainly evokes a lot of memories

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<v Speaker 2>from two years ago, and I think we have to

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<v Speaker 2>remember this is all part of a political campaign. Inevitably,

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<v Speaker 2>opponents are going to throw a bit of muder at

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<v Speaker 2>each other, see what sticks and evoke the scariest thing

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<v Speaker 2>that they can do, soje to try and kind of

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<v Speaker 2>focus minds. But I think there is a sort of

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<v Speaker 2>serious point behind those comments. The radidscianel has not laid

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<v Speaker 2>out its economic platform yet, but some of the suggestions

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<v Speaker 2>of what they could do and what they've talked about

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<v Speaker 2>doing in the past, such as cutting taxes, blurring the

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<v Speaker 2>retirement age, I mean, that would really cost an awful

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<v Speaker 2>lot of money. And that's where the Liz Trust comparison

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<v Speaker 2>kind of comes in, because of course Trust was well

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<v Speaker 2>known now for coming out with these unfunded tax cuts

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<v Speaker 2>that really spook to the market. And I think that's

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<v Speaker 2>kind of the context in which these comments were made,

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<v Speaker 2>that there is kind of that how do you pay

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<v Speaker 2>for some of these commitments.

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<v Speaker 1>The thing is, the UK's parliamentary system is very different

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<v Speaker 1>from the presidential system in France. Even if Macran's party

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<v Speaker 1>loses in the parliamentary election, he'll still be president. But

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<v Speaker 1>then let's, you know, game out a scenario where it

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<v Speaker 1>would be national rally. They would then perhaps hold the

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<v Speaker 1>prime ministership in France, would they have enough power to

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<v Speaker 1>make those big spending decisions.

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<v Speaker 2>I think it depends a lot on the alliance that

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<v Speaker 2>they're able to strike in the wake of the results.

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<v Speaker 2>So depending on how well they do in these elections

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<v Speaker 2>will determine the partners that they can draw on within

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<v Speaker 2>kind of the parliamentary system. And if they have you know,

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<v Speaker 2>a sufficient support, you know, then you could seize a

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<v Speaker 2>prime minister coming through from that party. If they're in

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<v Speaker 2>power in the parliament. I mean, they do have an

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<v Speaker 2>awful lot of ability to dictate the terms of conversation,

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<v Speaker 2>even if they don't necessarily have kind of the full

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<v Speaker 2>power that the presidency has. But you know, they also

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<v Speaker 2>have that democratic mandate and that's something that's very difficult

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<v Speaker 2>to overlook. If you're coming back into parliament having the

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<v Speaker 2>will of the people, as it were, behind you, then

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<v Speaker 2>that's something that really from a sort of optics perspective,

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<v Speaker 2>puts the pressure on to kind of accede to some

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<v Speaker 2>of their suggestions on the policy side.

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<v Speaker 1>Yeah, perhaps that carries weight. Mind you, France, how strong

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<v Speaker 1>has the fiscal position been recently?

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<v Speaker 2>Pretty bad, And I think that's one of the concerns

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<v Speaker 2>for investors heading into this election. I mean, just at

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<v Speaker 2>the end of last month, we saw a downgrade by

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<v Speaker 2>SMP debted GDP. I was just looking at it. It's

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<v Speaker 2>more than one hundred and ten percent at the moment.

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<v Speaker 2>Not exactly great. But one of the real issues has

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<v Speaker 2>been that with mccron losing his majority in the National Assembly,

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<v Speaker 2>he's really struggled to tackle that. Some of the reformers

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<v Speaker 2>that he's put forward have received an awful lot of

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<v Speaker 2>very public pushback and that's made it very difficult for

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<v Speaker 2>him to tackle. So I think that's where the bond

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<v Speaker 2>market has kind of become very important. You're even kind

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<v Speaker 2>of before this election, we were seeing French bonds underperforming

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<v Speaker 2>versus their Spanish Italian peers, and since we've seen the

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<v Speaker 2>election of volatility, you know, we've really seen kind of

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<v Speaker 2>French bond yields blowing out and actually some of their

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<v Speaker 2>debt yielding more than Portuguese, which is pretty significant when

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<v Speaker 2>you think about where we were in the sovereign debt crisis.

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<v Speaker 1>And how's the Liz Trust experienced sort of suffocated policy

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<v Speaker 1>in Europe because again a bit like maybe not definitely

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<v Speaker 1>not as severece the Greek crisis, but it has brought

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<v Speaker 1>to the four again the danger of angering bond markets.

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<v Speaker 2>Yeah, and they should be worried about that. We saw

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<v Speaker 2>kind of, you know, the real perils of that under trust.

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<v Speaker 2>You know, you saw the pound falling to a record low. Sure,

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<v Speaker 2>record moves lower for guilts, So there's real reason to

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<v Speaker 2>kind of worry. I think, you know, what we've seen

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<v Speaker 2>in the last sort of a few years really is

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<v Speaker 2>just because governments have had to borrow so much, you know,

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<v Speaker 2>to kind of fund the recovery from the pandemic. They're

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<v Speaker 2>in a vulnerable position, a more vulnerable position than perhaps

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<v Speaker 2>they've been in numerous years, because they really do have

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<v Speaker 2>to think about the stakeholders. And the stakeholders are not

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<v Speaker 2>just their voters who want certain things and a certain

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<v Speaker 2>quality of life, but the stakeholders are also bondholders, and

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<v Speaker 2>they are the ones that are ultimately advancing the money

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<v Speaker 2>to the government so that they can go forward with

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<v Speaker 2>their spending plans. But their wants and desires also need

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<v Speaker 2>to be taken into consideration, and what they want is

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<v Speaker 2>to make sure that the government in charge is fiscally

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<v Speaker 2>responsible and isn't diluting the worth of their debt by

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<v Speaker 2>going out and borrowing aggressively.

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<v Speaker 1>Rachel Evans are managing editor for FX and Rates. Thank

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<v Speaker 1>you so much for joining me for more explanations like

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<v Speaker 1>this one from our team of twenty seven hundred journalists

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<v Speaker 1>and this all around the world. Search for Quick Take

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<v Speaker 1>on the Bloomberg website or the Bloomberg Business App. I'm

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<v Speaker 1>Caroline Hepgar. This is his why. We'll be back next

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<v Speaker 1>week with more