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Tuesday, 24 October 2017

Sell France

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  • Peters 475px June 2014

Anthony Peters on French fiscal history and why he might be buying Spanish debt instead.

The BBC’s morning news, which frequently accompanies me while I devour my toast and my soft boiled egg, was atwitter this morning with news of the impending French budget and the leaked show-stopper that the national debt pile either already has, or is just about to breach, the €2 trillion mark. In debt/GDP terms, that equates to give or take 95%, which is a long way from that now seemingly long-forgotten Maastricht Treaty-imposed limit of 60%.

I admit to sometimes enjoying a little Schadenfreude when France, the old enemy, finds itself in a bit of a pickle. I suppose it must have something to do with my age and with remembering the swagger which France displayed under the Presidency of Charles de Gaulle, a declared Anglophobe, while Britain was struggling to downsize from global colonial power to small island in a cold, hostile sea. We resented watching the demise of our car industry, shipbuilding industry and rail system while France was propping up its own with eye-watering subsidies. We were being taunted for having a third-world health system while the French had it all. France was building the Pompidou Centre in Paris while we were closing down the Midlands.

The problem was and is, to quote the frequently hated and widely-misunderstood Margaret Thatcher, that Socialism works until one runs out of other people’s money. France has spent 225 years in pursuit of “Liberté, Égalité, Fraternité” and has, in most respects, not got much further than the rest of us.

What it has ended up with is an overblown public service sector, an overblown level of popular expectations and now an overblown debt pile. It is possibly the greatest example of the misguided belief that a country can spend its way out of debt. It is, after all, the place where Prime Minister Pierre Beregovoy introduced the 35-hour week in order to “spread the load” and create more jobs. The 10.5% of the workforce which is now idle might not agree.

The period of crisis in 2007/2008 offered the political class a unique opportunity to re-cut the national budgetary suit to match the fiscal revenue cloth. But how did it blow it? Instead of accepting that it had been merrily spending the 20% of VAT takings, the juicy corporation tax inflows and so forth – which it had collected on money spent that had never really existed – it tried to overcome the disappearance of something which wasn’t actually there. In a fit of self-deception, France was borrowing more while hoping that the fading mirage of non-existent fiscal revenues would somehow, someday, re-emerge in tangible, material form.

“Dirigisme” is not entirely perchance a French word and for years France and its politicians have sidestepped the thorny issues of reining in the state. Although Nicolas Sarkozy lost the presidential elections in 2012 as much as François Hollande won them, the country chose for itself a very old-style champagne socialist with the classic background in SciencesPo and ENA. As little as the politicians knew how to reform, the people mad it clear that they didn’t want to either.

U-turns

I cannot recall how often France has stood on the edge of the fiscal precipice but is has somehow always toughed it out. Who remembers the “Franc Fort” policy of 1992/1993 in which the Banque de France, under instruction from President Mitterrand, stared down the rest of the world which was convinced that the Franc was inherently much weaker than it was being traded in global markets? It was, incidentally, the successful defence of the franc which made the reputation of Jean-Claude Trichet, who was then governor of the BdF but who of course went on to greater things at the ECB.

Francois “Qui? Moi?” Hollande is currently in the middle of making a similar ideological U-turn to the one which Mitterrand made after having promised to nationalise more or less everything other than Brigitte Bardot – except that the state is now bigger, the liabilities are bigger, the deficit is bigger, debt is bigger, global growth is much, much smaller and the formerly endless stream of EU subsidies is being diverted to more needy areas of Europe.

France is a mess and, at 34bp over Germany, should really be a screaming sell. Could “sell France, buy Spain” really be the right trade? I wrote a column nearly two years ago suggesting that, despite all its current problems, Spain has to have one of the best growth stories in the whole of the eurozone. It might really be the right long term trade… and by long term, I’m not just thinking of next Monday week.

Volatility and risk

Meanwhile, the volatility in risk markets continues. We might, however, find a bit of stability with the beginning of the new and final quarter. Still using the S21 iTraxx Xover as the measure of all things, it has been up and down like the proverbials and I would not be at all surprised to see it close today closer to 250 than to 260.

Corporate issuance has become a bit more restrained and a lot less interesting after the mad rush in early September. That should support secondary markets and along with that the indices.

Whoever panicked and sold risk on the back of Bill Gross’ unfathomably childish exit from Pimco deserves to have their butt served to them on a plate. Close your eyes and buy.

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