A couple of days ago, I alerted you to the rather alarming prospect of a French sovereign default.
Marine Le Pen and her far-right National Front, have proposed to take the country out of the EMU. In other words, we’re staring down a potential redenomination event.
Needless to say, that would be a f*cking disaster.
Imagine that for a second. Imagine the impact on French banks. And on the ECB. And on asset managers. And on, and on.
Of course Le Pen won’t tell you about any of that. She’ll just say she’s restoring France’s “monetary sovereignty.” How’s that for an example of deliberately misleading voters?
Imagine, for instance, that Le Pen told voters the truth. Here’s ECB executive board member Benoît Cœuré’s assesment:
[Le Pen’s redenomination push] would lead to impoverishment that would threaten the jobs and savings of the French people.
Is his assessment self-serving? Well, yeah. But so is Marine Le Pen’s. Indeed, point me to something you did yesterday that wasn’t at least to some extent self-serving. We’re all self-serving.
And see that’s the point. Populists have a thing for telling you they’re returning power “to the people”, as if we’ve suddenly happened upon a bunch of “so-called” saviors whose motives are entirely altruistic. To wit:
What they’re really doing is grabbing power for themselves and taking advantage of “the people” who, thanks to a number of factors, are vulnerable to manipulation.
They are false prophets.
Indeed what you’re seeing from Trump, and Farage, and Le Pen, and Petry is an attempt to legitimize some folks’ decidedly illegitimate denial of reality.
Globalization is inevitable and from a utilitarian perspective, it’s highly desirable. It’s not realistic to believe that we, as human beings, can maximize our collective chance of survival in the universe without relegating nationalist tendencies to the dustbin of history.
That doesn’t mean we can’t maintain our identities and/or preserve our unique cultural heritage(s), but it does mean that we need to accept the fact that at the end of the day, we’re human beings first and Americans, Chinese, Indians, Germans, Russians, etc. second. If we don’t recognize that, we won’t f*cking make it. Period.
Let me drive home this notion of populist candidates legitimizing the illegitimate denial of reality.
Telling a factory worker in America’s rust belt that the reason for manufacturing decline is globalization and then going on to tell that same worker that we can fix that by tinkering with currencies and bullying other countries on trade etc. is pointless. And worse, it’s cruel. It gives people false hope.
Reality is sometimes difficult to accept, but you don’t do people any favors by helping them suspend it.
A friend of mine from India sent me the following screengrab the other day and it illustrates perfectly what I’m talking about:
You don’t do Gary any favors by perpetuating the idea that this is all Muhammad’s fault. And you certainly don’t do Gary any favors by telling him that in addition to stealing his job, Muhammad is also out to kill him.
So with all of that in mind, consider the following short excerpt from Citi, whose credit analysts note that, to put it colloquially, Marine Le Pen is about to f*ck us all royally.
Ms. Le Pen has stated that, if elected, she intends to take France out of the euro within six months (and hold a referendum on EU membership), with her spokesman confirming they would seek to redenominate the portion of the €2tn of public debt that is issued under French law (which is the vast majority). With the Front National also pledging to end central bank independence and considering monetary financing of public spending, it is hard to see a “new franc” being greeted with anything other than a significant depreciation.
The most obvious of a number of potential initiatives would be the likelihood of capital controls in order to prevent a run on banks. Depositors faced with the same one-way risk as domestic bondholders would surely seek to move deposits outside of French jurisdiction. The Greek experience shows that this need not happen instantaneously – it can be more of a jog, than a run – but the backdrop was different in that the Greek government (and the Greek people) at the time, even during periods of stress, sought to remain in the single currency. Faced with a French government actively going through the motions to restore the franc, the need for capital controls might arise fairly early on in the process. And our assumption is that these would have to be quite strong to be effective. We find it hard to imagine this happening without major consequences for operations of domestic banks, in particular, for which redenomination itself would pose quite a few challenges. Indeed, for the European banking sector as a whole, even with netting, margining, the move to central clearing and various regulatory initiatives, the implications for swaps and other derivative markets of redenomination and capital controls are presumably rather large – and well beyond the scope of this piece!
To be clear, we would not subscribe to the view that, as with the UK referendum and the US presidential election, it would end up as another instance where the market sells off against the prospect, but rallies on its realization.