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Well, look, let's start with Leonel's latest piece about this, talking about Sebastiana Lecornu supposed to be Emmanuel Macro's last chance man to keep his presidency on the rails through twenty twenty seven. Is Sebastian Lecornuo going to be able to do anything in the next forty eight hours that he hasn't been able to do over the past monthly and now?
Well, look, the new rule of French politics is it's not over till it's over, but it feels over, it's nearly over. The reason why I said that is because I think that snap parliamentary elections, which has been something that mac Colon's been trying to avoid ever since you called the last one last year, that for me has dramatically ramped up in probability, so that to meet us
like a very likely option. So what Mcorn's done is basically put that on the table and said, okay, this is basically happening, and you now have forty eight hours to avoid that.
Okay.
So in other words, the divide mine of Parliament used to be pro anti Macorn, willing to work with him or not now Mackcorn wants wants the parliament to be pro or anti snap elections. So basically all the parties around Mackcorn, especially the center left, have to basically decide are they going to risk their own jobs by letting parliamentary elections happen, or are they going to have one last,
last last attempt at a coalition. But frankly, all of the energy, all of the kind of gravity I feel, is slipping away.
Our buyou, Marcus, let me bring you in here, because we've got the oats bunch spread now eighty six basis points. And what analysts keep telling me is this isn't a crisis yet. So how much would it have to widen for this actually to be considered a crisis in the bond market?
A sharper move above one hundred would will concentrate some some people for sure. You know, the point here is that the ECB has some reserve weapons if it needs to transmission for tect and incident, which has never been tested and won't be under these circumstances. So you know, France is sort of on its own here, But of course it's not because we've seen over over all these
various different blips. You can go back to the snap election last year, last sort of June, that really the cavalry gets you know, the wagons get circled and Europe comes into at least soften the blows. So yes, the ECB no longer in theory is doing you know, quantitated buying. It's slightly letting some passive aggressive excuse me, my pun you know, drift off. But it's not there to actively
step in and bail out France. But if you look at the yields versus Italy, they've not ever so slightly above. But this is this is micro, real small stuff at the moment, it's just that why buy France? That's your answer. You're not getting any new money in if in doubt you're going to you know, if a bomb matures or you've got a better opportion, you're going to slide out of France. And that's where it's a slow gradual.
Liel I mean on that question of why by France. The conversation that we've had with Jean del Bartrom Blueberg Economics and plenty of others over the past couple of days has been this isn't a fiscal crisis yet, This is a political crisis, and realistically nothing's really changed in the past, probably since Vonso Beru, perhaps since Michelle Barney, and nothing's really changed either. They'll figure it out in
the end. What changes in that dynamic? Where does this Where do we get to the end of the road of sort of the gallic shrug.
Well, I think, as Marcus was hinting, you know, I've called France look big short, right. It is a big short on a relative basis because the political crisis is unfolding very slowly and everyone can see what's happening, and you can and you can model it out longer term. I think this is a political risk story in that an election changes a lot, and Marie Leupenn and her number two, Sean Don Baldella, are the politicians to beat.
Now the two big questions that the two planks of Macaul's legacy so far have been stable tax policy and an economic policy in France that is predictable, and pension reform and a general reform agenda. Those two things have been rewarded by investors over the past decade. Those two things are starting to crack because, as we've discussed, all the parties around him, especially on the far left on
the far right want to brush those away. They do not want stable taxation, they want more budget freebies, and they want to roll back pension reform. Those are the things that I think really could derail the French story even further, because then you get back into the old France, the pre macroorn France, but with a lot more debt and a lot worse budget deficit, which I think spooks European partners a bit more.
Just on the politics, two of Macron's closest allies have started to disown him, essentially Edward Philip, who okay had gone and set up his own shop, but was still a friend to a man your Macron, Gabriel Latal, the head of Macron's own party, saying on television last night she doesn't understand the president's decisions anymore. Is everyone now just positioning themselves with the next set of elections and trying to diss them someselves for Macra.
Totally totally, and that's completely logical, and backhor himself betrayed his predecessor, fran Solon, his father figure. This is the rule of French politics. I think what slightly new, I guess is that edwar Philippe been calling for a new presidential election, is really willing to get out there and say let's make history again. It's a kind of daunting proposition. I think he's now concerned that Marie Lepenn is the
politician to be even in a presidential election. Edwar Philippe had been groomed as the kind of potential heir of Macon. I think polls are quite alarming in the sense that they're showing, whether it's La Penn or her number two Bardella, they're really comfortably in the lead for a presidential election. So you can see there's a lot more panic, there's
a lot more fabrility. People are willing to push the boat out a little more in terms of radical proposals, and I think a macun resignation would be a huge bombshell and I think definitely pushed the spread two levels that Marcus was flagging.
Marcus, what does the market think of the far right in France?
Well, I think in essence it's it's one of these misnowners, is that the media portrays these you know, La Penn and her crews as far right, but in practice that they're very far left. In socialistic terms as an economic point of view, leaving some of the politics out of it. This would be no, maybe not quite as sort of Jean Luke Meler chanp you know, cryptocommunists, but it's pretty
close to it. And that would be you know, as lean I was very carefully pointed out on the various different flagships of the macaron era would be thrown out where we would be talking, you know, it would be very I'm sure friendly towards a wealth tax and indeed, of course running back that that pension reform which has been so so expensive to get it through and and so you know, important pivotal I think for how the
markets view French debt. So this really is this tactic of of Macaroni again is with this snap election last year and again threatening elections, it's to try and scare the National Assembly into doing what he wants. Let's hope that that there's something comes out this which is sensible and a government can be formed. I mean, if nothing happens, if then stands water, actually the budget deficit will improve.
But the question really is is that where it's twenty twenty seven and the president's collection all before that, if we do get either a hard left or indeed the the pen socialism version, that the France is going to be in a very different, painful world. Mostly the market expects it's not to happen, and at the moment that's why we're only inching slightly high.
Can we put to bed comparisons to the Liz trus era when we think about the situation looking at France todaily now.
Well, I think Liz trusts and breaksit are kind of useful barometers of what happens when a country sort of tests its reputation and long held perceptions from the market. Basically, I think, as Marcus has said, the ECB is there, the euro is there, Okay, France is too big to fail. So I think that there will be a question of okay, if there's a staring match between Frankfurt and Berlin and Paris, who's going to move first? But I think trust is frankly a useful reminder not to take things too far.
And I am concerned that if the politics gets more radical and le Penn becomes a little less mainstream and her number two decides to go a bit more radical as well on issues like pensions and taxation, you could get a much worse economic situation over the next few years, and you could end up with something approaching a trust moment, even if it's not exactly the same. So I don't think you could put it entirely to bed Marcus.
Is the other ingredient for this to turn into a trust situation that there needs to be a structural idiosyncrasy in the French bond market like we had with LDI in the UK.
Good question, No, I mean there is something you know going on at the moment in Holland and their pension system, but not so much in France, where the breakdown comes is used to be called bund plus, whereby particularly Japanese investors would happily buy French debt, which is, you know, larger than even the Italian in scale, believing they were getting the equivalent of of you know, bunt security of German sort of type stuff, but with an extra spread.
That trade, as I said, no longer happens. That's where you get the sort of you know, no longer are interested in France, You avoid France. It's not much you actively sell, you just don't put any more money. And when stuff matures you don't reinvest it, and that is you know, I think where we have a situation if we do get France downgraded by a second or third rating agency. We've obviously seen Fitch, but we've of course in the next two or three months leading up into
the end of the year. And also they have this excess definite procedure they have to get through Brussels that you might see that some of the index bond funds have to start selling because France is no longer sufficiently rated double A and slips down. So that's one one potential thing, but that again will be very much a slow burn. I think we'll see that coming from quite a long while way away.
Yeah, can you just give us a sense to wrap up this conversation of where the French public are in all of this as well? I do get the impression from the limits of conversations I have everyone's just a bit sick of us. Is that a fair assessment?
Yeah?
Sick, tired, disgusted, fed up, whatever you want, whatever adjective you want. The thing is that there's always there's always a there's two potential outcomes, right, Either France becomes a country almost like the Netherlands, or other countries where the politics is crazy, but somehow people carry on, businesses carry on, the economy carries on. We've seen a bit of that, or my concern is that we get much much worse
to come. There seems to be a nihilistic, almost nihilistic view in society, huge distrust of politicians, loss of faith in policy discussed almost with the political class, and that I think is very dangerous for the future.
And just in the short term. What do you think is going to happen this week?
I think mc horn is going to keep doing these kind of hail Mary Moose, But as I said, I do think parliamentary elections are the most likely outcome, if not the end of this year, in the studd of next year.
Okay, Leonella right here with me in Paris and Bloomberg Opinion, Marcus Ashworth joining us as well. Thank you to you both for talking us through the various aspects of this unfolding crisis. You can read the latest from both Marcus and Leonelle at Bloomberg dot com, Forward Slash Opinion