Is France Heading for a Financial Crisis?

0:01Anthony Cheung: This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome? That's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required, compatibility and availability varies 18+. Hello and welcome back to the Market Maker Podcast and today we are asking a question is France about to fail? You know you love it Pird.

0:37Anthony Cheung: With borrowing costs are surging past Italy and Greece, debt toppling three and a half trillion euros, street protests clashing with fiscal reality, has France become Eurozone's biggest financial vulnerability. I'm here, as I said, with Pierce Curran to break down the budget, gridlock, the debt spiral, and what all of this means for the future of the European economy. A little bit of tongue-in-cheek in the title, but we will address it. Is France about to fail?

1:12Piers Curran: it's if france's liz trust moment is on the near horizon um let's go so yeah let's set the scene

1:23Anthony Cheung: then with france's bond yields and where are we at and what is happening and how have we arrived at this particular point in time yeah so you'll have probably seen the headlines i would imagine

1:38Piers Curran: is definitely getting more and more traction in not just the financial media, but even mainstream media. But there's a whole cocktail of factors here, as there always is when you kind of get pushed towards the brink of a bit of a crisis. It's like the perfect storm where several forces are all kind of coinciding. So we have political risk. Ultimately, we are looking ahead to France's presidential election, which isn't until next year. When is it? I think maybe April-ish time next year. And so right now, the candidates are jostling, they're campaigning, they're setting out their stalls in terms of policy, obviously.

2:24Piers Curran: And so it's kind of during this period, you're getting markets reacting to possible outcomes at the presidential election next year, right? And so as the pollsters try and predict who's winning the race, and obviously this is a live situation, so candidates' chances are volatile, they're going up and down. And with the French system, you have this two-phase runoff where you get all the candidates in the first round, and then ultimately the two winners, they then go through to a second round where it's just head-to-head. So you've just got to figure out from a strategic point of view how might that all land.

3:04Piers Curran: and then ultimately who's going to be in the seat and what are their policies and what does that mean for France from a kind of fiscal perspective and this is the big problem France have fiscally they've just let themselves go a little bit let's say.

3:24Anthony Cheung: Just on the dates there so April 18th 2020 simmers the first round the runoff will be 2nd of May this has all come about because the incumbent president emmanuel macron is constitutionally barred from seeking a third consecutive term i mean he could all could always pull off a little

3:41Piers Curran: trump here just rewrite the constitutional rules or a zi jinping you mean or do a zi it's a better reference um yeah but for now we're assuming macron is out of the running whether he'd be would that be a good thing if he could do another tour or not obviously that's up for debate but look at the moment you know what's the problem well France have got too much debt they've got too big a deficit they've had basically political deadlock with a minority government in place having the power to do nothing in terms of reform and so ultimately their deficit has leaked and it's widened and they're worried that's the inevitability of politicians winning through giveaways cutting tax spending more right this is what the the electorate wants to hear but sadly for france there's there's nothing left in the coffers to be able to afford to pay for those giveaways.

4:46Piers Curran: And so the markets are just starting to look onto the horizon and they're starting to get a lot more worried about the direction of travel here. So you can see this in various markets. We always look to the government 10-year government bond yield as a litmus test of how are you getting on. That's like the grading system for governments in terms of fiscally, you're on a solid path. And for now, France's yields are rising. They're rising sharply. Their 10-year yield is nearing 5%. We'll come back to that point because you look at the US and the UK, or certainly the UK, our yields are higher at a 10-year level.

5:29Piers Curran: But for France, they were coming off a lower base. You remember, interest rates at the ECB are much lower than the Bank of England, for example. But anyway, they've been going up and they're near 5%. This is the highest they've been for 25 years. But then within Europe, we're like, okay, well, how are you getting on France compared to others? And what we look for is the spread. This is the spread between France, in this case, and the safest place in Europe, which of course is Germany. So we look at the French-German spread. That just means the difference in yield on a 10-year France bond versus a German bond.

6:11Piers Curran: And that's widened really sharply. And it's actually out now at 150 basis points. So look, yeah. And I guess the most alarming thing of that is, okay, well, how does that compared to others. And right now, the spread on French debt is wider, as in things are worse, than Italy or even Greece, which is quite remarkable if you were trading through the Eurozone debt crisis, which was 15 years ago. To be sat here saying those words is just frankly, A, pretty shocking, and B, potentially quite alarming.

6:54Anthony Cheung: Haven't we not been here before, though, with France? Isn't this just a pretty cyclical thing in France? Le Pen has kind of, oh, she's come to, I guess, the closest and perhaps could see this through. But over time, this has kind of come and gone. so is this just a little bit of market anxiety as is always the case and then settles down or is it just the accumulation each time we have one of these episodes the debt pile is actually fundamentally bigger each time and that's what causes the new or what if is this is the time

7:31Piers Curran: scenario yeah so that's it each episode each new episode the stakes are higher because a the debt levels are larger and b what's the difference this time the debt levels are always larger go back through all the episodes right but this time what's different is yes they're larger again but borrowing costs are suddenly steeply much higher than they were in previous episodes right certainly post-financial crisis episodes um and so so and then also france's deficit is is on you well It's not unusual for France. So remember, let's just make this super clear. When we talk about debt and deficit, these are two different things that are linked.

8:18Piers Curran: But debt is total, how much you owe as a government or as a business. Obviously, these companies that are borrowing in these kind of markets, they're issuing lots of bonds, right? And they've got lots of different durations. And so you have the French government that are borrowing over a 12-month period, a two-year period, a five-year, a seven-year, a 10-year, a 30-year period, right? Lots of different durations. And so their total debt is just stopped. Right now, if they had to pay back all of their loans, no matter what the durations, then that is their total debt. And right now for France, that's 125 % of GDP.

8:59Piers Curran: So in terms of comparing one country's debt versus another, you've got to obviously then factor in the size of the country. So we talk about debt to GDP ratios and so yeah France are at 120 or sorry 115 percent but climbing fast and it's the rate of change that's also key and look there's only in the world's top 20 economies um there's only a couple of so the US have 123 percent debt to GDP ratio uh Japan which is just an absolute like anomaly is out at 248 % and then Italy is 137%. Other than that, they're the worst, right? Then we talk about deficit. So that's now what on a 12 month basis as an entity that's spending money, you set out your budget, right?

9:52Piers Curran: We are going to spend X amount and we're going to split that up. We're going to spend this on defense, this on education, right? All the rest of it. And so we set out our spending and it's like, okay, what's our income expected to be in this coming year? That's a forecast, income through tax and so on. The problem with that income side is hard to predict because how much tax receipts you get is a function of economic growth, which obviously is difficult to model out and predict, right? And then obviously it's a function of borrowing costs as well, because if you're spending more than you are receiving, well, then that's a deficit.

10:31Piers Curran: And so how much more are you spending over and above what your income is? And that's what we call, when we say 5 % or 5.4 % deficit, that's they're spending 5.4 % of GDP. So that volume of money is the amount they're spending over and above what they're expecting to have as income. So running a deficit means you're adding to the overall debt pile each year because every single year you're borrowing. And the French problem is each government comes in promising, right, we're going to set a deficit reduction target. We're going to get back to 3%. Okay. And of course they fail and they fail and then they fail and they fail again.

11:15Piers Curran: And in fact, when you look back at it, the incoming government in 2019 set a deficit reduction target of getting back to a surplus. That means above 0%. Unfortunately for them, COVID hit and their deficit went to 9 % of GDP. But post-COVID, right, in 2022, they set... So at that point, their deficit was 5%. And they said, right, let's get it back to 3%. What's happened in the last four years? It's got worse. It's actually 5.4%. So the point is, every time someone comes in, the sound bites are, yes, we understand fiscally this isn't looking good. We are going to set out measures to fix this. Don't worry, lenders.

11:59Piers Curran: Don't worry, bond markets. You'll get your money back. There's no default risk here. Look, we've got all these plans. It's just that plans are one thing, execution is another, and that's where they fail.

12:11Anthony Cheung: So the lenders are willing to lend because with the deficit side that you mentioned, that was projected at 5.4 % of GDP this year, missing their 5 % target. But the structural deficit has been unbalanced since 1974. Yeah. So this isn't new.

12:31Piers Curran: Well, no. So that means they've had a deficit every year for 52 years. So it's definitely not new. it's just can we afford it and as we said every year if there's a deficit every year it means every year your debt pile is getting higher and higher and here's the point right their debt interest costs so where you know what's all this government spending why is there a deficit like this what are they spending the money on and the debt interest cost is now comfortably the highest line item in their expenditure each year. So they're expected to spend in the next 12 months, in 2027, the estimate is they'll spend 85 billion euros just on debt interest and compare that to the other, the next largest line item on their budget is education, where they're spending 63 billion.

13:33Piers Curran: Defense, they're spending 53. So it's just suddenly, but kind of the same in the US, I've mentioned this a few times, it's the debt interest cost has now become the biggest line item on the budget. And it's just money down the drain, isn't it? And really, you're just paying for that legacy of fiscal discipline, ultimately, which is the problem we have with, if you want to get really top level here, it's the problem we have with democratic governments. And ultimately, the way to win an election is populist measures we'll cut your taxes you know we'll spend more money on health care you know right and this is what gets votes of course it's just then they win and then oh god right actually we've now got to do that and then it's oh okay can we afford it and then this is where you get the muddle through and it's on this sustained debt sustainability track that's looking even more greasy and i i guess the floor has become even more slippery

14:39Anthony Cheung: because of like you said post-covid environment the iran war induced oil pressure on prices that we've had so you get these other unforeseen things exactly just add another firecracker into the into the mix that just makes things even more more worse so one of the things here is that you mentioned there that italy debt to gdp ratio is higher but italy seems to have been a little bit of a a fan favorite amongst fixed income kind of investment managers because of a degree of i can't remember what the stat was it was like there's been more italian leaders than there had been a football managers of like i don't know who it was yeah there's some sort of funny statistic man united yeah yeah we've we've had like a relative good period of calmness i guess on the italian front and people seem to have uh you know the natural thing you kind of get into power and you start to moderate your political views a little bit and so therefore pacify some of those anxieties about ripping up fiscal rules and so forth so has that also been a problematic for them and and you mentioned there this sort of self-fulfilling feedback loop because you've got other countries like Italy comparatively performing more favorably in terms of the investment managers moving the real money into those areas coming out of maybe France.

16:06Anthony Cheung: But then you've also got the heightened yields, worsening debt situation, and these sovereign credit rating agencies also making some noises. So is this like a self-fulfilling prophecy in some way?

16:20Piers Curran: I mean, it is. I mean, Italy is a good one to just touch on because what happened there is Maloney got into power, a right-wing government whose ethos is let's reduce the size of government, right? Which is very anti-French, very socialist sort of French historically, which likes big government, lots of tax. And we'll come back to that tax point in a minute because, you know, how do you reduce your deficit? Well, let's tax people more. But unfortunately for the French, there's not much room there. They already taxed their population more than almost every other major country on the planet. But for Italy, it's about coming in and making really hard structural change that ultimately means let's spend less money as a government.

17:04Obviously, in Italy, they've had, I would say, there was more of a tax evasion problem.

17:10Piers Curran: So if you're thinking about government receipts, they had a big tax, a massive black market. I think back in the day, almost like 50 % of their GDP was in the black market where there was no tax coming from that at all, right? So there's been huge reform on that side to improve the kind of tax receipt generation. But then they've also made structural changes to reduce spending, right? So they've gone through the pain. You go and look at Argentina as an even more extreme example, where that is ultra-right-wing, mega, mega-aggressive structural change to ultimately reduce the deficit. And Argentina had defaulted about 100 times in the last decade, right?

17:51Piers Curran: So it requires mega, mega, mega change. France aren't there yet. But this is the point. I think they are getting closer to this point of crisis. And I think the other thing to say is that the speed at which we're moving towards that crisis point is increasing, right? And you've got other stuff, like other kind of, to give it some context, if you think about other entities that are borrowing in this system, right? So I mentioned earlier, you have governments, you have companies. Normally, the normal way of things, the government is the kind of biggest entity in the economic system. Therefore, it's considered the safest.

18:33Piers Curran: Therefore, government yields are lower than corporate yields. And we talk about that spread as well, the spread between the government 10-year yield and a AAA rated corporate bond that's got a 10-year duration as well, right? And it's normally that that corporate bond will have a premium. That means the yield's higher. That means the lender requires more compensation for lending to a company, which is deemed to be more risky because it's a much smaller entity in the system compared to the government, right? That's the normal way of things. What's gone on here over the last few weeks is we've started to see some of the big French companies.

19:13Piers Curran: We've seen their yields move lower. Oh, sorry. The thing that's moving is the government yield. So the government yield is moving higher and it's broken up through the corporate yield so you've now got companies like lvmh sanofi airbus axa these french giants their yields are now lower than the french government and the only time that's happened you know in living memory um was in right in a very very height of the eurozone debt crisis where nestle well that was the only company at that point but Nestle, they saw their yields move lower than the French government back then.

19:55Anthony Cheung: Is this a bit of a fake headline in a way though? Because you said earlier that when a government is issuing bonds, they'll be issuing bonds over lots of different durations to serve different purposes. They might be rolling over maintenance programs of government spending, things like that. There's bigger long-term things. Corporates do the same. And then you talk often on these episodes about the shape of the yield curve. And when we talk about big macroeconomic data and it moves to short end, more sensitive, and you can have kind of almost like a dislocation between what we're thinking in the near term to what we're thinking the impact will be longer term.

20:35Anthony Cheung: So is that the same case here would apply?

20:39Piers Curran: Yeah, it's a good point. This episode is brought to you by Google Chrome.

20:43Anthony Cheung: You think you know a browser, but Gemini and Chrome, that's new. It can help you with practically anything on the web. like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required, compatibility and availability varies 18+.

21:06Piers Curran: Because it's a great headline for the media, right? Oh, you know, French companies now borrowing at cheaper rates than the government. You know, Armageddon is on the horizon. So it's a great headline. But there are some US companies that borrow at lower rates than the US government. Johnson & Johnson, their September 2027 bond, trades at 35 basis points lower than the 12-month US Treasury bill. Apple, just close, not far behind their two-year bond, trades lower than the US government's two-year bond. However, that's only at the short end of the curve. When you go out to the longer duration stuff, five years, 10 years, and certainly 30 years, then the government is the safest entity in the system.

22:01Piers Curran: Government bond yields in the US are lower than all of the corporate bond yields. This is the difference in France. It's right across the yield curve that you're seeing these corporate curves drop below the government's curve. So really, you're looking at France and going, well, all right, what other countries are you saying also has that similar thing where the whole yield curve is shifting below? And here, you've got to go emerging markets, right? It's Mexico, it's Turkey. And actually, Ukraine is a good example, given all the crisis and the war with Russia and all of the damage that's doing economically you know you're talking about countries like that where this kind of stuff happens not not france i mean france are well what are they they're like seventh largest economy on the planet and so this is why it's all the more alarming um and this is why i'm saying well

22:58Anthony Cheung: maybe a liz truss moment for france that does it have an impact in terms of when you look at some of the charts and you're looking at these credit default swaps. So your kind of costs of insurance against France defaulting has kind of ramped up in the last few weeks. But in the last few weeks, we've had lots of protests, blockades by students, nurses, civil servants. I guess that stuff, what gets the mainstream media's nose involved, and then they start pumping the headlines, such as why we're discussing this today. Does that drive sentiment to a certain degree?

23:36Piers Curran: Yeah, for sure. I mean, it's so interesting in France. They've got a culture of demonstrating. You know, go all the way back, your yellow jerseys and all, I mean, all the way back down the decades and decades, like their right to get out on the street and protest, they take very seriously. So yeah, there was a school, like a secondary school in Paris, where all the students basically blockaded the entrance and were all outside giving it the big one on the protest. it. I mean, if that was my kid here, I'd say, what? Get back in the classroom. Get back learning. Stop messing about on the street, right?

24:13Piers Curran: There's a completely different attitude. Whereas I'm sure in France, the parents of those kids would have been incredibly proud, right? And they're shouting and stepping up and fighting back for their rights. You know, it's a very different attitude. Now, the problem is that, back to my points around affordability, so on the one hand you've got a population that wants more they feel like they're you know they're the cost of living or their quality of life is going in the wrong direction and they want more they get taxed I think on average it's like 41 % tax which is way more than most advanced nations I think here in the UK it's more like 30 I want to say 30 early 30s I think it's like 33 % overall that's average proportion of your income that goes to the government as tax.

25:02Piers Curran: So they're already at 41%, right? So on the one hand, the population is saying, we want more. So actually, Le Pen is a good example with Le Pen. Because on the one hand, she's saying, okay, yes, we have a fiscal problem. So she's talking to the bond markets here. She's saying, right, if I get in, I will half the deficit. Again, a throwaway line, very easy to say, fantastically difficult to do. So she's talking to the bond markets, I'll half the deficit. But then she's talking to the voters by saying, I'm going to cut VAT on food. I'm going to do this. I'm going to cut this tax. I'm going to spend more here.

25:39Piers Curran: So she's trying to appease both sides. Unfortunately, that's an equation that doesn't balance. You can't say I'm going to cut the deficit in half over here. And then over here, you're saying, ah, here are these tax giveaways. So such is the nature of politics. And I'm sorry, I just think the only way out of this is it's the full-on crisis. It forces change. The system can't change itself. You need an external or an internal shock with then an external force

26:16Anthony Cheung: to kind of make it happen yeah because i i guess le pen gets in let's say and then this call for 60 gdp debt cap 125 billion euros in cuts uh as you said fuel food vat cuts lowering the retirement age so a lot of that stuff then politicians like i said earlier completely normal for them to make these grand promises but without the crisis then you're saying that all that all end up is we end up in the same situation just at another point in time down the road because there is no economic way of balancing the book to achieve anywhere near what she's suggesting and that's not a criticism of political view that's just the fiscal reality of the situation so what without a crisis, we're not going to fix the problem.

27:12Anthony Cheung: So does that mean the crisis is inevitable then at some point in the future? That's what I think. To get voted in, to have any chance of making a change,

27:23Piers Curran: you've got to get voted in. But the only way to get voted in is to say, oh, I'm going to give you this and this and this and to cut tax and that, right? So it just doesn't work. You bring up the pension point, which is really, really key here for France. one third of their national spending is spent on pensions that is paying people a monthly income that used to work for the state that are now retired okay that's one third of their spending on an annual basis now this is because historically the french have i mean let's just be honest no offense to the French. This is the situation. They just work less.

28:07Piers Curran: And they retire earlier and they work less. If you look at the average hours worked in a year, I've got stats for 2024 here. But in the US, which is like a mega economy that is on fire and growing rapidly, and look, the US have got a higher debt level than France. They've got actually a higher deficit than France as well. But you know what? Their economy's massive and it's a juggernaut and it's growing like crazy. So they can afford it. With France, they worked, in 2024, average worker worked 1 ,491 hours. In the US, it was 1 ,796 hours. So you've got like a 220 hour difference on average across the whole economy, right?

28:58Piers Curran: So you add up those man hours, I don't even know what number you're, you know, you're talking tens and tens of millions of man hours more. So they work more and then France, well, they retire earlier. So right now their retirement age is 62 years and nine months. In the US it's 67. You know, in the UK it's 66 moving to 67, right? So it just means they retire later. And obviously, you don't stop paying people's pensions until they've retired, right? So in France, you pick up your pension when you're 62, having worked a lot less anyway, and then the amount of money you get paid through that pension system is incredibly generous.

29:42So they've got this huge legacy problem of their pension system problem being,

29:48Piers Curran: how do you reform that? Well, raise the retirement age. But who wants the retirement age to be raised amongst the population? Well, no one. Why should I have to work till I'm 67 to pay for the last generation and the one before that who got to retire even when they were 60, actually, in France, right? So you've got this major catch-22 where they know the problem, it's just you can't fix it.

30:17Anthony Cheung: What about this idea of, as France is part of Europe, you're part of the club and so what's happened before is the european central bank has certain rules in place whereby if deemed then a risk to the club then the ecb does have the right to step in and start to intervene by french bonds force yields down so couldn't le pen just flirt with the the balancing line there get voted in get into power which is ultimately what you want and then at the end of the day if the shit gets close to hitting the fan the ecb project the european project's too big to fail the ecb will come here's a question how how long left has

31:07Piers Curran: christine lagarde got as ecb president i think is it may next year she's gone right so not long right my point being she's french so if you lose your french ecb president is there less is the less willing to ride to the rescue let's go back to 2011 or indeed 2010 in fact or or no let's go like 2011 so we had a eurozone debt crisis you might remember um we talked about peripheral Europe being the countries that were at risk of default. And ironically, France is the new periphery, as some of the headlines are saying. But peripheral Europe were the two big economies of Spain and Italy, and then the smaller economies of Portugal, Ireland, and Greece.

31:57Piers Curran: They were the five in the crosshairs back in 2011, where post-financial crisis, their economic ship and their fiscal ship were in worse shape than anyone else's. And that crisis meant that, oops, we found out we can't afford this. We're on an unsustainable path and we're going to default. And we were measuring that via government bond yields. And these bond yields were spiking and rising because markets were like, whoa, hang on, I need to sell my Greek debt here because the Greek government are going to go bankrupt. And I'm just going to, you know, it's like emergency fail. I get out as quickly as I can.

32:43Piers Curran: I'll take a 50 % haircut. I'll get half of my money out because if I don't, well, I'm going to get nothing. So stampede panic yields spiking. Okay. So that was back in 2011. The problem with that is this word contagion because they were all now in this Eurozone project where you had all these countries together in one monetary union all coming under the European Central Bank. And the thought was, well, actually, hang on a second, if Greece bankrupts, well, that'll then just trigger, well, hang on, Portugal will bankrupt, Ireland will go bankrupt. And then the worst of all, Italy and Spain will go bankrupt, meaning the whole of the Eurozone project would implode and the euro would cease to exist.

33:29Piers Curran: So all of that political sort of energy that had gone into creating that monetary union, which is all a legacy of post First and Second World War, by the way, it goes all the way back to that point. All of that would have been gone. So they were like, okay, we need to do something here. Because if we don't save Greece, if we don't save Italy, the whole project's done. So they stepped in and this famously Mario Draghi, go and Google this, Mario Draghi, I'll do whatever it takes. One of the most famous, dare I say the most famous monetary policy speech of all time, possibly, where he said, we will do whatever it takes.

34:12Piers Curran: And what was that? Well, it was actually directly intervening in government bond markets. They were buying Italian government bonds in size. And what does that do? Well, it has a market impact, right? And it forces the price up and it forces the yields down. So they directly made it cheaper for Italy to borrow by buying government bonds in the secondary bond market, saving the day, making their fiscal situation sustainable and rescuing the whole situation, right? so this could could this happen this time you know is france too big to fail what do you think of course it is

34:56Anthony Cheung: which is why i was just for marine le pen i'm saying let's go let's promise the world and some and you know the our friends over in frankfurt will come and save the day don't worry about that the one thing i mean that i remember when you're describing greece there was things like capital controls being imposed yeah then i guess it's like weaning someone off a off a drug where they start then loaning very specific maturities of debt they defer your debt interest payments and then they start to then lift some of these things gradually as your health starts to return

35:36Piers Curran: over time yeah well i would put it in stronger terms here's the deal france if it gets to this point right where these bond yields start really really climbing six percent seven percent well actually one of the big issues sorry just a slight aside there's a lot of japanese um institutional money coming out of france at the moment so a lot of these big insurance companies in japan rather than, so all insurance, right? You pay your insurance on a monthly premium, right? So these insurance companies have a lot of money coming in, okay? And obviously, they've got to pay out when someone has an insurance claim.

36:14Piers Curran: But in the meantime, they're managing a massive pot of money. So what do they do? They invest it. Low risk, you know, fixed income generating stuff. Problem with Japan is rates are really low. So they send their money overseas and go and buy bonds in other countries, right? A lot of that goes to the US, yes. But actually for France, Sorry, for Japan, they took on a strategy of rather than the US, let's diversify with some euros. And they chose French bonds as their kind of, because it's a really large, deep financial market that can absorb a lot of money. Also, they've got a really strong financial system and big French banks and so on.

36:52Piers Curran: So they chose France as a really key destination. So they went, converted yen to euros, bought a load of French bonds, right? Well, now they're going, oops, that's probably a bad idea. Let's start selling, getting our money out of France. So you're seeing, of course, that means selling, prices go down, forcing yields even higher. So that's that kind of negative feedback loop, which is sometimes it can go beyond the point of no return when you then have to have ECB bailouts and so on. But it's also driving down the euro. The euro is at a 17-month low against the dollar because people like big Japanese insurance firms are selling euros to convert their money back to yen, or maybe they're converting it to dollars to go and buy US government debt instead, right?

37:40Piers Curran: So you got that going on. But my point was going to be, it's a two-way deal, right? Let's talk about Greece. Greece were bankrupt. They were going bankrupt. Their bond yields hit. I mean, God, I can't even I can't even remember what did that 10-year bond yields hit you might be able to fact check that whilst I'll explain the story here but um they were going bankrupt and so what happened was they got bailed out and they got bailed out by this thing they ended up calling it the Troika okay which is three entities so it was the basically Brussels the EU um it was the IMF and it was the ECB. And their first bailout program was 110 billion euros.

38:30Piers Curran: So they basically said to Greece, right, we will keep you afloat, meaning you can't borrow anymore from the markets because the cost of borrowing is now too high because everyone thinks you're going bankrupt. So stop borrowing from the market. We'll pay for your deficit and we will fund your operation until you turn things around. But this isn't free money. It comes with requirements. And those are forced fiscal adjustment requirements. So my point right back at the start, you know, the system can't fix itself. It needs to break and then be forced to be fixed by an external party. So this is where the ECB and the IMF and so on then force austerity, where they force the, otherwise you don't get your money.

39:17Piers Curran: So for Greece, his 110 billion, you don't just get it all in your bank account, off you go. It's like you get monthly installments and you only get your next monthly installment if you're forcing harsh fiscal adjustment. So this is really, really, really, really painful. And when I mean painful, here are some stats for you. The GDP in Greece from 2010 through to about 2018 fell by one quarter. The size of their economy shrank by 25%. Unemployment peaked at 27%. Youth unemployment briefly went above 50%. Okay. And so hundreds of thousands of Greeks emigrated to different countries. that's the pain they had to go through to turn the ship around and look don't get me wrong here we are 15 years later and Greece's economy is in fantastic shape it's one of the most attractive best growing you know fiscally disciplined economies in Europe now it's just they had to go through that 50 15 year forced adjustment in order to get that I was just having a look

40:33Anthony Cheung: because there's a lot of data sets that don't go back unless you pay for them. But it's got on Gemini's fat check, it's got the Greek 10-year government bond reached an all-time high, March 2012, 41.7%. By comparison, it got a record low of 0.53 % August 2021.

41:01Piers Curran: Okay, there you go. so that was on the way back what post-covid when everything got slashed right so that's i mean so we're talking about five percent here for france greece 40 right it doesn't you don't you can't get to 40 that's when they were in their bailout phase right but seven i remember back in the day on the desk eurozone debt crisis i remember seven was a really red line in the sand it was like right If Italy get to 7%, this whole thing's game over. So that's a really key number to kind of have in the back of your mind.

41:39Anthony Cheung: What about when you read other people? So the runoff here is likely to be Le Pen versus Jean-Luc Mélenchon, who's on the left. And he's always been someone who said, look, we should be taxing like 100%, but we should be massively hiking corporate taxes. And he's talked about, well, we'll just write the debt off. Let's just get rid of it. Yeah.

42:02Piers Curran: Well, I mean, I love it. It's a great vote winner. He's talking to the populace there, right? He's saying, guys, I don't know what the other lot are talking about and messing about that. All this debt, who cares? Let's just write it off. What's going to happen? What's the worst that can happen? Well, unfortunately, Mel and Sean, you're showing your chronic lack of understanding of how the whole system works. And so if they just, I think his words were, we'll just throw the debt in the fire. That's the kind of direct translation. But what would happen? Well, firstly, no one on the planet would then lend to France again.

42:47Piers Curran: Problem being, they've got a 5 % deficit. So they need to borrow this year, right now, They need to continue to borrow in order to fulfill their XYZ promises. Second, about 50 % of that government debt is owned domestically. French banks, for example. So French banks suddenly lose all their money. Well, what's going to happen then? Well, if I was a normal punter on the street and hang on, BNP Paribas owned X billion of French government bonds that suddenly disappear. I'm like, oh God, hang on. They might collapse. You know what? I want my money back. I want to withdraw all of the money out of my deposit account right now.

43:36Piers Curran: So this triggers a run on the bank, right? Let's go and search up Silicon Valley Bank or even Northern Trust here in the UK in 2010, which kind of kickstarted the whole sort of financial crisis here in the UK, right? It would trigger a collapse of the french banking system um so it would be the most spectacular own goal in in many a year so unfortunately melanchol whilst there's a good line and might win you some votes uh you can't you can't deploy that tactic northern rock you were referring to rock sorry

44:12Anthony Cheung: not northern rock sorry yeah i do remember northern rock's windows getting i remember being sat in the office sat in front of all the screens and it was all you know going going heavily down across every single instrument and i remember hearing this really loud like there was protests at the time and we had a memo in our building where we were told we should come in dressed discreetly i right not wearing any smart clothes because you'll get lynched on the way in and i remember hearing this massive like protest and a bang and they literally bricked the northern rock because yeah everyone lost their money but there were lines down the street yeah it was crazy

44:59Piers Curran: each of the branches feels a bit archaic talking about physical bank branches uh not really a thing so much these days but is it and actually that's a point by the way because a runner on a bank now would happen way faster because you just get online quick i want all my money out now you know so the whole thing would collapse um much quicker yeah like the transmission against over social

45:22Anthony Cheung: media threads things like that the mood yeah movement like yeah wall street bets and things like that it happens so violently and quickly to catch that sentiment but i guess then the conclusion here i kind of see it two ways one way is like you put your trader hat on and i I kind of can't help but think having lived through markets for the last 20 years that we get this run up and then I want to fade the move because France is too big to fail. There's some easy money to make there on like the decompression of like the inflated spreads that are going to happen over the coming period, probably between now and the election.

46:02Anthony Cheung: Risky game, I know.

46:03Piers Curran: Yeah, not easy money.

46:05Anthony Cheung: Not easy money, but historically the reversion to the me.

46:11Piers Curran: Well, I was talking to the world's biggest hedge fund and their graduate hires last week in New York. And we're talking about relative value trades, fixed income relative value trades, where you're playing the spread. So if you want to trade this, if you're fading the move, right? So if you think the French yield is climbing and it's getting too far away from the German yield, and historically those yields are much closer together. So there's a big divergence. so one trade is a mean reversion trade you think that's not sustainable that has to come back right so you you you kind of short the oh well you're buying french bonds and you're selling german bonds to get that yield compression back down okay the problem is if you're too early and it carries on widening how much pain can you endure and if you're leveraged this is where you get a big problem and and if you're you you might have the right trade but just be a little bit too early and you lose all your money okay i'll take back yeah i'll go

47:17Anthony Cheung: back and erase the easy money easy money but i do feel like the those exact same players in the market you mentioned and also the fact that there's not many people i'd say who are sat in those types of funds who've got 20 plus years experience where it'll be like oh wow this is really bad because if your experience hasn't lived even the 2010 to 2012 period you're probably thinking wow this is a big problem for france yeah but you know there's big problems when you've lived a big problem a few times you kind of feel a bit more comfortable with the big problems but the other thing then is the fact that if it's not going to default tomorrow you said there could in the future be a necessary crisis that could bring about real fiscal change.

48:07Anthony Cheung: Does that mean then that France faces the possibility of a protracted period of sluggish growth, hiring and borrowing costs, structural debt drag, meaning that from the big real money investment managers of the world, like your Japanese insurers, just start to pick Italy and the trade then is not so much Let's just get out of the kitchen here and the risk of being burnt on that compression trade being mistimed. Why not just look at this long term and be like, well, France is just going to be a structural underperformer against this European pierced.

48:49Piers Curran: I think it's kind of, it's almost inevitable, I think. And it's just, it's kicking the can down the road and ultimately the bill comes due. it's just who's who's in a worse position i guess the problem is from a contagion point of view let's just paint the worst doomsday scenario here if this all happens to france let's say 2027 let's say you know well le pen's gonna win probably she's 60 likely to win but look just play with me let's say melanchol wins right let's just say and then the bond markets freak out we break the 7 % yield handle. And that just then leads to Japanese insurers pulling all their money out, which means that the yields spike even more, which means then the government can't afford to borrow.

49:35Piers Curran: ECB comes in, bailout. Let's just say all of that happens. It's almost like, is that a road test for what is coming further down the road for other countries that are not as bad as France at this point but are heading in that direction the uk for example or maybe the us even right so is this the playbook is it the french playbook that's going to be really the the sort of that guinea pig along this path where this whole fiscal sustainability thing is going to blow up however there's one savior that could come in and and save the day and that is

50:20Anthony Cheung: go on hit me a a i maybe oh we had to go there it's the a i boom right but can it come in time

50:32Piers Curran: for france i don't think so so that election is really key i mean to say the very least um can they just thread the needle between keeping the population happy and the bomb markets happy for long enough.

50:46Anthony Cheung: What is it that France has got? It's Mr. Al, isn't it? It's the big AI French firm. Yeah, so they've got some action. Too much recently. France not at the cutting edge of robotics? Not some, well, they do.

51:02Piers Curran: To offset that pension age? I'll tell you what they have got. They are building data centers and they have got energy. A lot of nuclear energy. True. Which is in there. That's some ace cards in their back pocket. It's just whether it's enough, whether it will come in time. Is the AI revolution going to happen quick enough? You know, so, yeah, it's interesting.

51:25Anthony Cheung: All right. Well, look, let us know what you think if you made it this far into the episode. Look, we try to keep it as shooting straight as we can when it comes to our political dispositions. So hopefully no one's going to judge too much, but the chat was... Judge away.

51:45Piers Curran: Judge away. Let's go. Let's have the comments. Come on.

51:48Anthony Cheung: Yeah, but let us know what you think about the economic situation, at least, and the fate of France. We'd love to hear what you have to say. And yeah, thanks for listening and thanks, Piers, for your insights. Fall has never looked or tasted this good. Sweet Green's fall harvest menu is back with seasonal favorites dressed to impress and made to be devoured. Warm roasted sweet potatoes, crisp apples, maple glazed Brussels and crave worthy flavors in the autumn harvest bowl, maple glazed salmon plate and roasted bacon Brussels side. The season's most desirable menu has returned to Sweet Green featuring fall's best dressed.

52:28Anthony Cheung: Make your move. Order on the Sweet Green app.

52:30Piers Curran: See you later.