1.7 Trillion Reasons Why This Whole Populist Thing Is A Terrible Idea

“Thanks populism.”

That’s a phrase I’ve used a lot recently. And it’s a phrase that, thanks to the clearly derogatory undertone, has elicited more than a few angry e-mails. Maybe I’ll print some of them this weekend (without the names attached of course).

A whole lot of people have gotten it into their heads that they have a once in a lifetime opportunity to participate in and perpetuate some kind of historic uprising against a cabal of nefarious global elites who conspire daily to keep the downtrodden masses underfoot.

Not to put too fine a point on it, but that’s a whole bunch of senseless bullsh*t. Nobody is out to get you and no, the people who meet in Davos at the World Economic Forum are not involved in some kind of ongoing conspiracy to ensure that Joe the plumber stays a plumber and Joe ETF will never get a slice of a hot IPO.

Sure, rich people tend to get richer and they also like to stay rich. Just like powerful people tend to get more powerful and exhibit an overriding desire to hang on to that power. But this notion that Donald Trump, Marine Le Pen, Nigel Farage, and Frauke Petry are going to usher in some kind of nationalist renaissance (assuming that’s not a contradiction in terms) that will see power redistributed to “the people” (whatever the f*ck that means) is bogus in the extreme. Need proof? Just look at the number of Goldman bankers in Trump’s inner circle.

But while populist candidates spewing nationalist vitriol likely won’t do anything to change the fact that Mark Zuckerberg is Mark Zuckerberg and you’re… well… not, do you know what they will do? They’ll end up destroying what little everyday people do have by throwing the entire global order into chaos. And that’s not hyperbole.

Over the past couple of days I’ve documented the exploding OAT-bund spread which effectively represents the political risk markets are pricing in around the French elections. As a reminder, if things go horribly “wrong”, Marine Le Pen and everything that comes with her (agenda wise) will sweep to power in France. Here’s a no bullsh*t assessment of that risk courtesy of Citi:

For sure, Marine Le Pen is a massive tail risk for Europe and risk assets more generally. She favours pulling France from the Euro/ EMU to restore the FFr 1 and ending free migration to France which might effectively mean leaving the EU altogether. And she leads in polls for the French first round Presidential Election on 23 April with immigration the key issue in her favour.

We are a little reluctant to write this [Heisenberg: how about that for a sign that Citi is nervous]: but Citi’s base case – see here – is not for Le Pen to win. If she did win, it would be as the result of some unexpected failure of the “Republican Pact” to sacrifice personal/ party interests in the second round to keep FN out. But, even then, she would still need a National Assembly majority in order to hold a referendum on EA/EU membership. And Legislative Elections in June, again over two rounds (11th and 18th), would in turn be highly unlikely to return a majority of National Front MPs3 .

So there are a series of diminishing probabilities here. A high one that Le Pen wins Round One, a much lower one that she wins round two and an even lower one that, if she did become President she could really take France out of Europe.

That said, this latter outcome would be so seismic for Europe, it is worth thinking about worse case scenarios. After all, the EU effectively IS France and Germany and, especially after Brexit, would be in a death spiral if France left. Significant currency risk would likely return to all current EUR denominated assets, risk assets would likely correct sharply and risk free yields fall in strong currency countries.

Now if you’re one of the poor, misguided souls who is prone to buying into the stories you read on alt-right websites (and you damn well know which ones I’m talking about), I strongly encourage you to read the following excerpts from a piece out on FT and tell me again about how the notion that populist candidates will throw the world into chaos is mere bombast.

Via FT

Around €1.7tn of French public debt could eventually be redenominated into francs if the far-right National Front party gets into power, according to party officials, in what would according to ratings agencies amount to the world’s largest ever sovereign default. 

While polls suggest the National Front leader Marine Le Pen will come second in the election in May, investors have been pricing in the increased risk of an FN victory as her main rival on the centre-right François Fillon is weakened by a scandal about jobs for his wife and children.

In comments that are likely to amplify fears about the impact of a FN victory on the global financial system, several senior-ranking party members have told the FT that in power the far-right would seek to redenominate around 80 per cent of the France’s €2.1tn public debt – the part that was issued under French law – in a new national currency.

David Rachline, the head of strategy for the National Front, said in an interview that only around 20 per cent of France’s total public debt “falls under international law [and would stay denominated in euros] . . . but for the rest we will have the right to change the currency.”

This would, according to rating agencies, be likely to amount to the largest sovereign default on record, nearly ten times larger than the €200bn Greek debt restructuring in 2012, threatening chaos to the world financial system on top of the collapse of the single currency.

Moritz Kraemer, S&P’s head of sovereign ratings, said in a written statement that this would be a default. “There is no ambiguity here . . . If an issuer does not adhere to the contractual obligations to its creditors, including payment in the currency stipulated, [we] would declare a default.”

Oh, and just to dispel one more popular alt-right propaganda meme, George Soros is probably not secretly Mephistopheles.

(name that movie challenge)