00:00Well, ahead of the confidence vote, outgoing Prime Minister François Bayrou warned that France's debt crisis is an invisible, unbearable hemorrhage.
00:08Despite his stark words, Bayrou's gamble to slash spending failed.
00:12Public debt is near 114% of GDP, the deficit soaring at 5.8%, and bond yields are higher than that of Greece.
00:22In the eurozone's second largest economy, is it becoming the new sick man of Europe?
00:28Let's answer this key question with Charlotte de Montpellier.
00:31She is a senior economist at ING.
00:35Charlotte, thank you so much for joining us on the programme.
00:38I want to start off by getting your reaction to the piece of breaking news that we've had tonight.
00:46Tell us how you think he'll go about looking to tackle the big question of the budget.
00:51Will he do like François Bayrou tried to do in slashing the massive deficit with those spending cuts?
01:02I think at this stage it's very difficult to say.
01:06What we know is that nothing is solved.
01:08So the centre bloc in the assembly still doesn't have a majority.
01:16So it means that they need to have an agreement with the left and probably the right together, all together.
01:22And this will be extremely difficult.
01:24So at this stage it's very, very difficult to say whether it will succeed.
01:28It's not going to be easy.
01:31That's very clear.
01:32And it means that probably it will take a lot of time to form a government and to be able to start discussing the budget itself.
01:40So I would suspect that it will take a lot of time.
01:43I think probably at the end there will be a consensus on maybe less cutting in spending this year.
01:51But it does not solve the problem, which is quite big with the public finance situation.
01:55Well, as you mentioned, the economy is now very much weighing on the minds of many people here in France.
02:03I want to first of all ask you to explain to us how bond yields work,
02:08because that's what has been on the minds, as I said, of many people here in France.
02:13Why is it such a concern?
02:16So the issue right now is the fact that public finance are a bit under control.
02:22So just to give you a small number, but I think it helps with the idea.
02:28So as you said, the deficit is already very high this year, probably around 5.8%.
02:34If nothing is changed, it goes to 6.1% next year.
02:38And it means that the debt to GDP ratio, which is at 114, will go to 125% in 2029.
02:47So this means that without doing anything, there is a structural problem in the public finance situation because of the aging of the population, because of the low growth.
02:59And that, of course, is an issue for the investors, the people that are buying French debt, because they think, okay, since the public finance are not under control,
03:11they want to be remunerated a bit more, so they ask for a higher risk premium, and that's the situation currently.
03:20So investors are asking for a higher risk premium for France, if you compare that for Italy or Spain or other European countries,
03:29simply because their public finance metrics are much better than in France.
03:33So France is in a much worse situation, and hence, the investors, they want to be remunerated for this risk that they are taking while they lend money to the French authorities.
03:45Over the past couple of days, we've heard a lot of comparisons between France and Greece, as well as Italy.
03:52Those are countries that traditionally have high bond yields.
03:56Some saying that France is now the sick man of Europe, the problem child.
04:00Do you agree with that assessment?
04:03Speaking from a public finance point of view, it's true.
04:06So the public finance are much more deteriorated in France than in other countries, so that's very clear.
04:11But it does not mean that there is no solution, there is no way to end this situation.
04:16So we know that the French economy remains relatively strong, that there is a way of having some more taxation, there is a way of cutting spending.
04:27So it's more about the political situation that makes it very difficult to find a budget that is a bit of a worry for the investor, more than about the state of the economy itself.
04:39So it's a bit different than in other episodes in history, where, for instance, with Greece, there were a lot of concerns about the economy itself,
04:47whether it would be possible to earn taxation because people were evading taxation is not the case here.
04:54The thing is that since the political situation is so difficult, it seems very clear that it will be difficult to find an agreement, and that's a worry for investor.
05:04But it's not a full-blown crisis, I would say, to be very sure.
05:09It's more like that the worry has increased, so that means more higher risk premium and so higher bond yields.
05:16Well, Finance Minister Eric Lombard has even suggested that the soaring national debt could force Paris to request a bailout from the IMF.
05:25He's since backpedalled on that because of calls that he was over-exaggerating the situation in France.
05:33If the country would need a bailout, the IMF wouldn't even be the first point of call, would it?
05:38It would be the EU.
05:40Explain to us that process and whether you think France is even anywhere near that point.
05:46I think it's not, I mean, it's not likely at all at this stage.
05:50And to be sure, the IMF, they don't have the foreign power to do that because they are used to help countries that are much smaller.
05:57So it won't happen like that.
05:59But to be sure, if bond yields were to increase too much, so the spreads between France and other countries in Europe were to widen too much, it would be a concern for the ECB, actually, because it means that monetary policy transmission will be difficult.
06:17And this concern by the ECB would mean that they would be able to use one instrument they have, which is called the TPI.
06:28So this is something they can do with their, they have a lot of bonds in their portfolio, so they can do something there.
06:35What it means, basically, it means that it is avoiding, because it exists, this system by the ECB, it is by itself avoiding that spreads widen too much.
06:48So that's already something.
06:49And to be sure, we are not in a situation where we are going to go to the IMF.
06:55No, there are several steps there, and probably we are not going to even touch them.
07:01So it's not this time of crisis at this stage.
07:04What is sure is that public finance are deteriorated and investors are worried about this situation.
07:10So it means that the new government will have to work on that and to promise a plan that they are going to actually do.
07:18And so that's the big question right now.
07:21And let's see whether it is the case or not.
07:24And then investors will reassess the risk.
07:26But at this stage, it's not a full-blown crisis, to be sure.
07:30Charlotte, really great to get your insight today.
07:31Thank you so much for joining us on Prime News Paris.
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