On Oct. 22, French public radio France Info told the auditors: “On Oct. 28, 1966, French President Charles De Gaulle stated that ‘the policies of France are not decided by the stock market.’ That, of course, is no longer the case today.”
A financial expert confided to this author: before, politicians would make up a budget and then seek approval from the financial world. Today, it’s the other way around: in London, banks and insurance companies fix the budget first; politicians are later called in to approve.
Giving substance to that evaluation, Les Echos, Le Monde, and Le Canard Enchainé comment on the recent trip of French Minister of Economics Roland Lescure to London, hardly a month before the date on which the French parliament has to approve the budget. Lescure, writes Le Monde, traveled to London “to reassure City investors about France’s financial trajectory. Some foreign investors are choosing to sell their French bonds.”
Having worked in the banking sector, Lescure “is no stranger to roadshows,” notes Le Monde. On Oct. 8, after having met his UK counterpart, talked to “The Economist” and the London School of Economics, Lescure “brought together about ten international banks and asset managers in London to reassure them about France’s financial trajectory and its ability to pass the 2027 budget, if necessary by decree,” (if the parliament fails to give a vote of approval).
The day before, Lescure told the Wall Street Journal: “We will do everything to pass the budget, whatever the cost.” One day later, Lescure went to Luxembourg where, at the Ecofin Council dedicated to the capital markets union, he discussed with his counterparts how to ease the bond market tensions, “even though intervention by the European Central Bank (ECB) is completely ruled out at this stage,” writes Le Monde. Finally, the IMF’s meeting in Bangkok some days later gave Lescure occasions for private discussions with global financial players, including some Asian funds that are already turning away from France.
According to Mohamed El-Erian, a world-renowned financial expert and current economic advisor to the Allianz Group, “The three most vulnerable countries in the world today are the UK, France, and Japan. All three have too much debt and too many deficits.” Le Monde writes: “The role they play in global finance and the sums that would need to be mobilized to save them make this crisis more alarming than the one that struck Spain, Greece, and Ireland in the early 2010s.”
The French government keeps a close eye on Japanese investors. The Sumitomo Mitsui fund has already chosen to sell all of its French bonds, due to the country’s deteriorating fiscal situation, in order to focus on German bonds and, to a lesser extent, Japanese bonds. Japan held $145 billion (nearly €130 billion) in July, and its disengagement could have a ripple effect.
“If the ECB lets things continue as they are, we can fear that the French ten-year bond yield could climb to 7%,” Hideo Shimomura of Fivestar Asset Management told Bloomberg. France and its European partners, Germany in particular, don’t want to entertain the idea that the ECB might come to France’s rescue, but “if French rates rise by just half a point, the ECB’s alarm bells will start ringing. The G7 countries aren’t wired to withstand such rate hikes,” Mohamed El-Erian added. “Without a budget, the risk is that the French financial turmoil will spread throughout the entire economy. “In the United States, they say the tail is wagging the dog. In other words, the financial markets dictate the course of the economy, instead of reflecting it,” concludes Mohamed El-Erian.
French interest rates went beyond the 5% threshold, and Moody’s is expected to downgrade France this Friday, while new demonstrations will take place on Saturday and a general strike has been called for by the CGT union on Nov. 5.
