Is France too blasé about borrowing costs?

0:00Rob Armstrong: Rob and I have been very clear about this. We do not want another Eurozone government debt crisis. Thank you very much. The last one was no fun at all. And yet, France seems to have other ideas. It has elections coming up and its bonds are going down. Now to be very, very clear, right from the top, we are not in crisis territory yet, nowhere close. But I can feel it in my waters. This thing is not going to go away. So today on the show, is it time to get our tin hats out of the attic and fret about another round of existential strife in Europe? Or is everyone getting a bit overexcited? This is Unhedged, the markets and finance podcast with occasional added singing from the Financial Times.

0:48Rob Armstrong: I'm Katie Martin, a markets columnist in the dungeon of FT Towers in London. and people, we are getting the band back together again because joining me down the line from New York City is the big fella, Papa Bear, Rob Armstrong. Rob, say hello.

1:03Katie Martin: Hello.

1:04Rob Armstrong: But also, joining me in the London studio, I'm not entirely sure why, but Rob and I have started calling him Baby Bear. It's Markets Reporting Whiz, Mr Ian Smith. Ian, thanks for coming back. Thank you. Thanks for having me. Thanks for my nickname.

1:20Katie Martin: Wonderful to have that out there. Now that Ian has this nickname, is he required to be bearish about things?

1:25Rob Armstrong: That's the problem.

1:26Katie Martin: Like, is he pre-committed now? Like a central banker who's given too much forward? You know, I'm just, I'm the future. You know, you guys were the future ones.

1:36Rob Armstrong: So, as we all know, bonds are bad. US government bonds are bad. They're dragging all the other bonds down with them, especially the ones from countries with high debt levels. Bonjour, la France. So, Ian, Rob is here to ask questions like, what is France and which currency did they use? But tell us, why is France getting it in the neck in the bond markets at the moment? Yeah, so France has had the biggest jump in its benchmark 10-year borrowing costs since the Iran war began. So out of all the G7 countries, say? Yes, out of all the G7 countries. And that's because it had a debt problem going in, Bocou de debt, as I think, as they say over in France.

2:21Rob Armstrong: There's going to be some bad French in this podcast. Let's stop this right now. Let's just stop it right now. It's obviously then been put under stress of its refinancing by surging global bond yields. But it also has a domestic political situation where you've kind of had the rise of the populist politicians on both the left and right, which are making investors nervous that a country that is struggling to get its deficit within 5 % of GDP might actually be headed for worse on the fiscal side ahead of the April presidential election. So, yeah, a mixture of those domestic political concerns, a lot of indebtedness coming into the crisis and just the pressure from those rising borrowing costs everywhere.

2:59Rob Armstrong: So where does it stand in terms of like debt to GDP levels compared to other big economies? So its debt is approaching 120 % of GDP, which is high, of that kind of 100 % danger level, and the Eurozone average is lower. So that's been painful for them. And on the borrowing cost side, its 10-year bond yield has climbed close to 5 % in recent sessions, you know, higher since 2002, and something that investors look at really closely, which is how much they're paying more to borrow than Germany, which is the benchmark safe borrower within the Eurozone area, which France is within Rob has reached above 1.5 percentage points during this so that's taken you to the widest spread for France since the Eurozone debt crisis it pays more to borrow than Italy it pays more to borrow than a lot of French companies now have a lower borrowing cost than their own sovereign which is really an inversion of the normal kind of market dynamic and it just shows that France has gone from being the safe borrower within the Eurozone to being more of a degrading credit, as the asset manager Vanguard put it to us in a recent story.

4:05Rob Armstrong: Yeah.

4:06Katie Martin: Katie, this all sounds awful. What makes you say we're not in crisis territory? What's different about now and 2013 or whenever the last horror show was? That was around 2013, wasn't it?

4:17Rob Armstrong: It reached a peak or a depth, if you like, I guess around 2012. But it just rumbled on for years. But look, it might be worth, for people who were not around or who were annoyingly too young at the time to go through what happened in the last proper Eurozone debt crisis. So there was the crisis of 08. I think we're all pretty familiar with that. And then right at the very, very end of 2009, Greece was like, oh, so guys, like, no big deal. But, like, some of our finances are actually a little bit iffy. And some of the numbers that we gave you to, like, join the euro, maybe they weren't entirely on point.

4:56Rob Armstrong: And so the gates of hell opened up and swallowed the entire Greek government bond market whole. And then the reason this got really bad was when Greek government bonds got fried, then the market started looking around for the next weak link. And so like Spain started selling off and Ireland sold off and Portugal sold off. And some of these countries ended up needing forms of bailouts. And the thing that got really sticky was that at the time, the really important holders of these government bonds were banks all around Europe. So it was like, OK, if Greek government bonds failed, then we're going to have a bunch of bank failures across Europe.

5:39Rob Armstrong: But it was genuinely a moment where it looked like at certain points the euro might just die and no one had a plan B for what else to do. And I mean, Rob, you must remember, it was a grinding nightmare that went on for years.

5:52Katie Martin: No, I remember it well. And all I got from it was a T-shirt that says, Angela Merkel thinks I'm working, which I bought while I was vacationing in Greece. But this time, presumably, at least the link to European bank balance sheets has been severed. And presumably, because we've been through one crisis, there is mechanisms in place for the European authorities to manage any problems that do arise. In other words, we've had practice with this now. Yes. And that's got to be reassuring. Yeah, there's two main reasons to be reassured. There's the playbook from that. The ECB, the European Central Bank, has all these tools that it can use to stop contagion from one country to the rest of the Eurozone.

6:42and has demonstrated that it will stand behind the euro and do whatever it takes to support the euro. Whatever it takes. Whatever it takes. So that's one. But the other reason to be reassured is that a lot of people think we're a long way short of even reaching ECB support. So, yeah, it is a big question in the market. How wide does that spread on French debt have to go or how much contagion does there have to be into other areas of the eurozone debt market for the ECB to do something? But that doing something will probably just start with talking about the problem, really. We're not saying that, you know, you're in a drastic scenario.

7:12Nearly everyone I speak to would say this is not a rerun of the early 2010s. You know, the institutions are stronger. The kind of euro area is stronger. But also France, you know, it has a fiscal consolidation plan. It's just struggling to achieve it. So the reason people are worried is that the political direction of travel is a bit worrying. But Marine Le Pen, the far right presidential hopeful, who's the bookies favorite to win at the presidential election, this week set out her kind of savings plan. So she's trying to strike that kind of fiscal hawk pose to reassure other markets.

7:43Rob Armstrong: Yeah, so that's the thing, isn't it? Like a normal person might just say, okay, France is spending too much. The government bond market doesn't like it. That's pushing up French borrowing costs and that's a problem economically for the country. Why doesn't it just cut spending? And like, you know, two things, this country cannot pass a budget. I mean, heaven knows it has tried, but just the French politics are so polarised. You've got a left wing, you've got a right wing. They can't be friends and there's nothing in the middle and it's very, very difficult to get anything through Parliament. Secondly, the minute you suggest in France cutting back on public spending, they do what they do now.

8:18Rob Armstrong: They like riot in the streets. Like there are students out now smashing up their schools and, you know, throwing fireworks at the police all over France over cuts to spending on education. So they're trapped. They're trapped between, you know, we framed it as between the bond market and the barricades and our big read that we did this week. there's calls for more spending from the street and there's calls for less spending from from the market and the problem is that the necessary fiscal consolidation to get things back on track like in every other country is made worse by rising yields right so you need to do even more and that's even more politically painful so even this le pen savings plan you know lots of economists are looking at it and saying well there's some kind of funny numbers in there you know it would require doing some things like reducing a contribution to europe and also cutting off benefits to foreign nationals that would be difficult to actually do.

9:07So people are already looking at the far rights plan and saying, well, do I kind of believe that? So there are pain points right now that investors look at.

9:16Katie Martin: I wonder if there is a global point to be made here. So worldwide, the artist formerly known as the right wing has turned into populism. and it used to be that at least nominally the right wing would say stern and grown-up sounding things about budgets and of course there was a fair amount of hypocrisy in this and everybody is a budget hawk when they're not in power and etc etc but populists don't even pretend to be serious about fiscal issues. You know, Donald Trump says, inflation will take away our debt problem. I mean, he said that out loud last week, I believe, you know.

10:07Rob Armstrong: Is he still planning to give everyone$5 ,000 each? Yeah, exactly.

10:12Katie Martin: No, I think that has been walked back on little, tiny little fancy feet. So it's like there's this political shift where who now is the part of the political spectrum that wants responsible budgeting? And the answer may be no one.

10:32Rob Armstrong: Well, that's the point, isn't it? So you've got like Le Pen on one side and she has put out some fiscal plans and the market's like, you know, it's better than nothing. But the guy on the other side, the left wing potential challenger to her, if it comes to a runoff between the two of them, is Jean-Luc Mélenchon. His plan is just like cancel a bunch of bonds, right? Cancel some of the debt held by the French Central Bank, which is questionable legally, politically. And if they did, it could prove self-defeating because the market would just be like, hold on, put a load of risk premium into French bonds in terms of higher yields.

11:09Well, yeah. eroding any kind of gain. If you're holding a French

11:11Rob Armstrong: bond and he cancels another French bond, what are you going to do with the one that you hold? Quite likely to sell it, I would say. Yeah. No, I agree. Yeah, I mean, I think given that Le Pen is far more likely to become the leader of France than he, you would think this is, you know, it's not something the investor's taking hugely seriously, but it does underline this kind of unwillingness to take seriously the debt problem in some areas of the political class. I suppose people would look to Italy and say, like, the market was very bearish about Maloney in 2022, as far-right politician came to power, and then actually surprised the market by being a lot more fiscally conservative.

11:51And there's been a huge rally in Italian debt since. That's a very good point. You could see Le Pen trying to do the kind of Maloney playbook. But investors are also looking at her promises to, you know, decrease the retirement age for certain people and saying, well, that's the kind of opposite of what needs to be happening in France. You know, is she really serious?

12:08Katie Martin: That was the absolutely fatal clause in what she said. Yeah, we're very serious about all this, but we will reverse the higher retirement age. Yeah. Some younger people. A policy everyone can agree France desperately needs to keep, except 60-year-olds in France. Yes. They are the dissenting voter. Yes. The one thing that France could do that would completely change its debt dynamics would be to increase its retirement age. So they have tools where they can dramatically change the outlook for their debt. And it would mean that the rioters would be much older, which makes them easier to control.

12:49Katie Martin: I'm in favour of this.

12:54Elderly bear.

12:56Rob Armstrong: My daughter's literally getting her first taste of tear gas out in France at the moment. She's sitting around having a coffee and it all just kicks off.

13:04Katie Martin: A little pastis with a whiff of tear gas on top. There should be a name for that cocktail, actually.

13:12Rob Armstrong: Probably is. And then the drama stepped up this week with the French central banker. Well, I was going to ask. Oh, yes. Enter stage centre. Emmanuel Moulin, who is the governor of the Banque de France, so the National Central Bank, he was saying very normcore stuff, right? He was. He spoke to our colleagues in Paris. norm core but you know fairly drastic in the sense that he's saying the country is being strangled by higher interest rates yeah and it needs to strengthen its public finances often central bank governors stay out of kind of politics but you know this is an important moment where people are talking about the health of the country step markets and the broader risks that spill out from that so that invited criticism then from melanchon who said on twitter you know accused Mulan of treason, which then Mulan responded to.

14:01Big words, treason. Saying that he would not be intimidated. And I can't think of another country where there's been this kind of back and forth between the central bank head and the political leader. That sounds terrible.

14:16Rob Armstrong: But yeah, so that is just a sign though, isn't it? That like this is a bunch of people who are not good at compromise, I'm going to say, being diplomatic. So what is the way forward? Because, you know, as we were just discussing, like you have got the European Central Bank there in the background. It is really good at putting out debt fires. It understands the assignment. It has seen this movie before. But I guess on a certain level, the fact that the European Central Bank is there in the background, maybe that's stopping French government bonds from falling even faster than they are today. And maybe there's a sense in which the European Central Bank just has to let France suffer from really high borrowing costs to show the politicians that if you don't do this stuff, then you're just hurting yourself.

15:04Rob Armstrong: You're just shooting yourself in the foot. So, I mean, Ian, when you talk to people in the market, you know, we're not at the point where the European Central Bank needs to intervene yet. But when does it do that? Does it let France feel the flames on its feet? There is a view that they will have to. Otherwise, they're just helping to offset everything we've talked about in terms of like, you know, the attitude to spending and the kind of fiscal situation. Yeah, so they've got to let France feel the pain. That's definitely a view out there. I think some people say it's more important how much contagion there is to other eurozone debt markets.

15:40Like that's the thing that will really prompt them to act. Obviously, though, France is more important to the eurozone than kind of smaller economies from the past. And they can't really let the second biggest economy in the euro area have a proper debt crisis. Lots of people believe that. So you would think that there is a level on the France-Germany spread at which the ECB says this is just too high. It's hard to get people to come up with a number for where that is. You would imagine it would start with kind of a verbal intervention, as I said, and then ultimately they will just be ending up buying French government bonds if this continues at some point, because they can't really let France have a deeper debt crisis that hits wider euro area growth and drags on kind of like credit.

16:24We saw kind of credit spreads widened too when the euro was weakening.

16:28Rob Armstrong: Yeah, so corporate bonds were getting in a bit of a mess as well. Rob, what does this all do for global attitudes towards Europe from where you're sitting? because I pick this up from like US and Asian asset managers all the time. It's just like, oh God, you know, Europe's a mess. I can't be bothered with it. You know, I've got opportunities in Asia. I've got opportunities in the States. Why would I bother with Europe? And it's notable that of all the sort of big national stock markets in Europe, France is the only one that's negative so far this year. Lots of them are kind of sailing along just fine.

17:01Rob Armstrong: And France is like, no, not you. We're not buying French risk. Why would we do this to ourselves? So, like, Rob, this doesn't help, does it? It doesn't help the image.

17:10Katie Martin: It doesn't help. But in connection with something else I've been writing this week, I've been thinking a lot about Europe and talking to European equity managers. And something they point out is that the really great European and French companies are really global companies.

17:30Rob Armstrong: Yeah.

17:31Katie Martin: Right. So there is a way that the strongest European companies are a hedge against the European debt situation because they're truly global and they're brilliantly managed and they're exposed to a lot of different currencies and they borrow in a lot of different currencies. So as I say every morning, let me say hooray for the equity market.

17:58Rob Armstrong: Yes. Stocks will save us. But Ian, if you were a betting man, I mean, what portion of next year do you think you're going to spend obsessing over the inner workings of the French government bond market? I think potentially quite a lot, right? Because we have the budget wrangling that's going to be happening soon. We then have the run up to the presidential election. Then there'll be kind of question of what follows that. I spoke to an investor the other day, so we won't have real clarity on the political situation until like midway through next year. You question how long the stalemate can last before the market starts to get really nervous about where the resolution comes.

18:37Rob Armstrong: But either way, France is going to have to pony up if it wants to borrow money, because if it carries on like this, I'm afraid that's the sort of thing bond investors do not like. Speaking of things we do not like, we're going to be back in just one second with Longshot.

18:58Rob Armstrong: Alrighty, it is time for Long Short, that part of the show where we go long a thing we love or short a thing we hate. Ian Smith, before you lose your voice, what are you saying? I'm going to go short ever-expanding motor vehicles. Oh, right. They're getting ridiculously big. And I know over in the US this is fine with your wide highways, Rob. But here in the UK with our higgledy-piggledy little towns and country lanes, it's these kind of metal monsters taking over more and more of the road. Have you been in an accident, Ian? What brings this on? Just walking around my market town and literally getting myself and my kids run over by these growing Range Rovers and this Jaguar now that's coming out that's supposed to be two meters wide and five meters long.

19:46It doesn't even fit in a normal UK parking space. I don't know. I know you don't use meters in the US, Rob, so it's probably like 50 hot dogs long and then 20.

19:56Katie Martin: There's been a lot of uncalled for teasing of Americans on this show, and I'm going to register a complaint with my ambassador.

20:03Rob Armstrong: Okay. Have fun with that. What are you long or short of?

20:07Katie Martin: As a middle-aged man, I am contractually obligated to be long the novels of John le Carré. And the reason I mention this today is because you think, Like, oh, he was a kind of quaint Cold War writer and his memory is slipping into the past. And then you read the following headline in the FT, former German spy chief arrested for treason. Which is a hell of a story, if I do say so myself. And it reminds you that the themes that Le Carre explored will always be with us.

20:42Rob Armstrong: Yeah, yeah, yeah. No, exactly. That is a great little story. I am long Norway, land of the free. I'm involved in Wigglesworth. It is taking a leading role in the fight against my least favourite things, which are, as you know...

21:00Katie Martin: Pervert glasses.

21:01Rob Armstrong: Pervert glasses.

21:03Katie Martin: Yeah.

21:03Rob Armstrong: So Richard Milne of the FT is writing that Norway's centre-left government has become the first in the world to propose a ban, albeit a temporary one, on the use of AI glasses in certain public spaces. Yes, bruv. So, yes, I know they are useful for certain people with certain visual impairments, and that's fine, but you've got to take this technology off the perverts before it's too late. This is a hill I'm prepared to die on. So, if need be, I will move to Norway. Holidays in Norway ahead. Holidays in Norway. I'll go and bunk up with Robin Wigglesworth. Ian, thank you for your service. Please don't get properly ill.

21:40Rob Armstrong: listeners say no to pervert glasses and we will be back in your ears on tuesday so listen up then