“1.7 Trillion Reasons Why This Whole Populist Thing Is A Terrible Idea” has become one of the most read pieces in Heisenberg Report history since I posted it three days ago.
In it, I documented the dangers inherent in blindly following populist politicians like France’s Marine Le Pen who has pledged to take France out of the EMU, triggering a redenomination event that could very well lead to a technical default on some €1.7 trillion in French public debt.
Le Pen tells voters she’s “taking back France’s monetary sovereignty.” The ECB will tell you she’s going to impoverish the country’s citizens.
It’s ultimately up to voters to decide who’s right and to decide whether ratings agencies’ opinions carry any weight.
But what’s not up to voters (or to Le Pen and the National Front) is how those ratings agencies assess the institution of a “new franc.” Put simply: the ratings agencies would likely declare a default. It would, by many accounts, amount to the largest sovereign credit event in the history of the world.
For those interested, I wrote more on this in “‘They’re Stealing Our Jobs!’: Populism And False Prophets.”
Well, in a further testament to the impact the resurrection of nationalism will likely have on markets, Fitch was out Friday warning that Trump’s policies could well prove catastrophic for the rest of the world. Below, find some telling excerpts from the ratings agency’s note.
The Trump administration represents a risk to international economic conditions and global sovereign credit fundamentals. U.S. policy predictability has diminished, with established international communication channels and relationship norms being set aside and raising the prospect of sudden, unanticipated changes in U.S. policies with potential global implications.
Canada, Germany, China, Japan and Mexico [are vulnerable] and the list is unlikely to end there.
One interpretation of current events is that, after an early flurry of disruptive change to establish a fundamental reorientation of policy direction and intent, the administration will settle in, embracing a consistent business- and trade-friendly framework that leverages these aspects of its economic program, with favourable international spill-overs.
In short, a lot can change, but the aggressive tone of some administration rhetoric does not portend an easy period of negotiation ahead, nor does it suggest there is much scope for compromise.