Pantheon's Debono: Election Doesn't Mean French Markets Will Get Back on Track

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00:00Why have you upgraded your outlook for France?

00:02The data is actually all right coming out of France at the moment, despite all the noise

00:05we're getting on politics.

00:06Yes, exactly.

00:07So, we've had some good monthly numbers come in, especially on industrial production.

00:11For example, we had a huge jump at the start of the third quarter.

00:15And these have fed in through our now-cast models to make us push through with a bump

00:19up in our numbers.

00:20So, does France actually need a budget at the moment?

00:22It seems to be doing all right on its own.

00:24I mean, European countries are used to not having budgets.

00:27So, I mean, a clear example of this is Spain, where they've been rolling over budgets for

00:32years.

00:33But for France's case, it's under the clutch, as we say, under the watchful eye of the EU,

00:43having, of course, a significantly bigger budget than the EU's budget limit.

00:47It's supposed to be 3%.

00:48What is it going to be, do you think, next year?

00:49Well, we've got something closer to 5.5 and then coming up to 6 again, if they don't do

00:55anything.

00:56So, they do need to get in some significant tightening, otherwise they're going to continue

01:01to be in trouble.

01:02Right.

01:03So, Melanie, good morning.

01:04So, it seems that the markets breathe a sigh of relief when they see some kind of certainty

01:08and predictability in a budget maybe qualifies as that, or at least the fact that we won't

01:12get rid of the Prime Minister this week qualifies as certainty, probably, in French politics.

01:17So, that's fine in the instant, in the first moment.

01:21But in the second moment, maybe you start to think and markets start to think about what's

01:25the fiscal cost of backtracking on the pensions narrative.

01:28I mean, how does that start to stick to France?

01:31Where do we start to see that sort of fear emerge?

01:33Exactly.

01:34So, at this point, the Prime Minister decided that he would shelve the pension reform, right?

01:38So, there won't be a pension age increase, at least not until 2027.

01:42And that seems to have appeased the socialists, who will probably support him in the upcoming

01:47no-confidence vote.

01:48But that's not to say that they'll actually support the full budget that he then presents

01:51later on.

01:53And so, we could be exactly in the same point of losing another Prime Minister, losing a

01:58vote of confidence in the budget in just a few days' time.

02:02Also, the alternative, so going to an election, doesn't necessarily mean that France will get

02:08back on track in terms of its public finances, and therefore, markets right now might be welcoming

02:15the stability or thinking that there will be a government in there.

02:18However, in the long run, they'll probably again start to think, actually, probably next

02:23government also won't push through the cuts that are needed, and therefore, France is still

02:27in a bind.

02:28Okay.

02:29So, we watched spreads with that in mind.

02:30Let's think about the role of the ECB.

02:31Now, I know you don't think the ECB needs to or will step in, in this particular case around

02:36France.

02:37We've heard about other things the ECB does, obviously, rates, interest rates.

02:40We've heard from the Bank de France governor, Francois Villarreal de Gallo, he's been talking

02:44about the next move not being a hike, the next move from the ECB not being a hike, so suggesting

02:50it'll be a cut.

02:51But then McClough saying he's more worried about inflation.

02:53Are we closer to a direction for the ECB?

02:57So, in our view, a cut is not coming.

03:00So, of course, everybody left the last meeting thinking they're surely not going to cut.

03:04And then a few days later, we had even more threats from the tariff side and therefore,

03:08downside risks to growth.

03:10And again, the potential that there could be a cut in December came to light.

03:16However, we don't think that the inflation numbers will give the ECB the possibility to

03:20do that.

03:21So, inflation is likely to stay just a touch above 2%.

03:24Inflation expectations are broadly stable.

03:26So, there really isn't a need to cut if the focus remains on inflation.

03:32Also, quoting from that interview with the French central bank governor, he also said that

03:36France needs to make major spending cuts or tax rises in order to get spending in shape.

03:43When you're pricing up the options, what's actually affordable on top of suspending the

03:49pension reforms if Le Corneau needs to make more compromises with the socialists?

03:53Well, I mean, there's a lot of choices that governments can look at when they want to

03:58raise revenue.

03:59They can turn towards taxing banks more or something, for example, that Italy is currently considering.

04:05Or they could decide to cut other things such as maybe spending in other areas where they

04:11have in the past continued to spend a lot.

04:15France, unfortunately, has spent quite a lot on a lot of things in recent years.

04:21So, there are many areas that the prime minister could look at and where he could reel in spending

04:29cuts.

04:30Unfortunately, we don't think that he can do it all in that way and taxes do have to rise

04:34in France.

04:35But you talk about, Anna, the breaking point where the ECB maybe would have to step in

04:40and intervene with the Oatsbun spread.

04:42And you've written, Melanie, about 110 being the level that would force French politicians

04:47to really think that the bond vigilantes would step in.

04:51But we're not going towards that.

04:53We're going down.

04:54We're at 78 basis points here.

04:56I wonder if you think that actually it's the politicians who are the guardrails here who

05:00are in charge of leading the markets.

05:02It's really everyone seems to have to get in line with what the socialists want here.

05:07And since we've seen this relief in French bonds, do we think it's going to last?

05:13I don't think it's going to last.

05:14So we have this stability right now, which, of course, in two days time when there's another

05:20vote of no confidence could already fall.

05:23The spread could already start to increase again.

05:26We then have the issue of when a full budget is presented to parliament, will the socialists

05:30back the prime minister?

05:32We don't think so.

05:33Or at least there's still a question mark over that because they said that they will only

05:37support Le Corleu's government if they see strong policies coming in.

05:43So how long do you think this government will last for, then?

05:45It could last for.

05:47We could see a game of chicken where after this the president is again forced to bring in

05:51more prime ministers because he doesn't want the alternative, which is going to an election,

05:55which right now the polls would say the far right would most likely win.

05:59Do you think Le Corleu will still be prime minister by the end of the year?

06:01I'd take that as a no.

06:06Nobody knows, really.

06:07But going back to Guy's point on the data and on growth, do you see a resurgence in business

06:12and consumer confidence if that instability is the story all the way for another 18 months?

06:17I mean, there's there's two sides because, of course, there is maybe this high uncertainty

06:22for investment and firms shelving plans also not just because of what's happening domestically,

06:27but also what's happening across the globe.

06:29If you've got trade uncertainty so high because, of course, the U.S. administration is up and

06:33down about what they want, even from the EU after having signed a trade deal, they will

06:38maybe hold back on certain investment.

06:40However, because the ECB has cut rates so significantly over the past year, they're seeing lending rates

06:45come down and down and down.

06:47And what we're seeing is that lending is going up.

06:50So people are taking the opportunity of lower rates and actually borrowing more.

06:53So credit will support the economy.

06:55Quick question on Germany before we wrap up.

06:57Everybody's got very excited about the fact that we're going to get this big fiscal impulse

07:00that it's coming, it's going to be massive, it's going to be transformative, it's going

07:03to change the European economy.

07:04Where is it?

07:05Yeah, good question.

07:07So the German government has decided they're going to splurge on investment, but they haven't

07:12said exactly what they're going to spend it on or how they're going to fund it.

07:15Yeah.

07:16And in our view, it's going to have to be funded by a significant jump in debt.

07:20So we've estimated that they'll probably have to issue around one trillion over the next

07:24decade or so.

07:25And that's going to keep German bond yields high.

07:27So even if spreads like for Italy and France come down, yields will stay up.

07:31And you think Germany's in a recession?

07:33Yeah.

07:34Yes, we do.

07:35Yeah.

07:36The industrial production and trade numbers were absolutely horrible in August.

07:38And even with a rebound that we expect in certain monthly numbers in September, because

07:43for example, we see the indicators like on cars are very good for September.

07:47That won't be enough.

07:48At least the first print will show a recession because of course we get lots of revisions

07:52from Germany.

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