00:01France's fiscal mess is getting worse, but what's the price of protest?
00:08France's crisis is escalating.
00:11Protests have left hundreds of millions of euros in damage and led to thousands of arrests.
00:16The government faces an urgent task in restoring order,
00:19but it must also confront a deepening fiscal crisis.
00:22French bond yields have hit 5% for the first time since 2002,
00:26as the politics of deficit reduction grow ever more toxic.
00:30So is France spiralling out of control?
00:32Well, it's asked George Buckley, chief European economist at Nomura.
00:36So George, CAREFOR has warned that the unrest will hit earnings this year,
00:40an early sign of the economic fallout.
00:41So if protests and disruptions persist, how much critical damage to French growth?
00:46It could be sizeable.
00:47One of the interesting things is that since the start of the year, since the war in Iran,
00:52France has been unusual in the scale of downward revisions that we've seen to economic growth forecasts.
00:59So not only have we seen increased inflation, but we've also seen downward growth revisions.
01:04And of course, that could continue with what's happening.
01:07It's not just the political unrest that could cause that.
01:10It's the fact that, as you've mentioned, financial markets are really in a fix there.
01:14We've seen spreads to Germany of 10 year yields rise to 175 basis points today.
01:22And that combination, which will also hit consumer confidence as well,
01:28could have a material effect on French GDP.
01:32And that's in relation to other countries, which look like they've actually weathered the storm,
01:38the Iran storm and the energy storm quite well.
01:41We have seen European GDP growing reasonably solidly.
01:45But France is the outlier and it's getting revised down.
01:48Another revision.
01:49Moody's is due to review France's sovereign rating on Friday,
01:52with an already negative outlook pointing to the risk of a downgrade.
01:55So how significant would that be?
01:57I don't think it would be that significant because I don't think it's that surprising.
02:00I think everyone's expecting that to be downgraded.
02:03As you mentioned, it's already on a negative outlook.
02:05It is slightly higher in terms of the rating than the other two major rating agencies.
02:12So I don't think it would be too surprising.
02:14But if that ends up being a catalyst for further downgrades from other rating agencies,
02:20then I think that could have more of an impact.
02:22And the mood music is clearly not going in the right way for France.
02:27So I think that could also have an impact on market sentiment, even though it's fully expected.
02:32So with presidential elections looming next April, the next leader will have to rein in the deficit.
02:38But proposals such as cancelling more than 500 billion euros of debt are being floated.
02:42Is that a serious option?
02:44I don't think it should be.
02:45I think cancelling debt would certainly raise eyebrows.
02:50It would clearly be a concern for investors.
02:54Because, of course, if you can cancel debt, what else can you do?
02:57And, you know, why would investors put money in France if they thought they were potentially weren't going to get
03:03money back?
03:04So I think it wouldn't be a sensible option in my view.
03:09And I think there are other things that France could do.
03:12The problem is there is just very little willingness, both from politicians and from voters,
03:20to accept that France does have a very challenging fiscal situation and a lot needs to be done to tighten
03:28the purse strings.
03:29If you look at what they've proposed for this year, this 54 billion of cuts, that would take the deficit
03:35down to 5%.
03:36It would be about a half a percent cut.
03:38But they would need to do another 1% in the year after and another 1% the year after
03:44that of GDP,
03:45which is far too much to be accepted by politicians or the public.
03:51So it does seem very difficult to see how that 3% target that the European Commission is requesting of
03:58France under its programme
04:00to get it back to an even keel on the finances seems very difficult to see how that's going to
04:06be met.
04:06Well, France now accounts for less than 3% of global GDP, less than half its share in 1980.
04:12Does it make problems less of a threat to the global economy or does the risk of contagion remain across
04:17the Eurozone?
04:18No, I think France is still the second largest Euro-area economy behind Germany.
04:24I mean, another way of looking at it is it's still worth 20% of the Euro-area economy.
04:29It's still a major part of Europe.
04:33It has driven European policy.
04:36So I think it's a major risk.
04:39And if anything goes awry in France, it does affect, as we've seen, sentiment across the entirety of Europe.
04:47And this is going to be something which needs to be addressed.
04:50France is too big to fail.
04:52Let's talk about the ECB now.
04:53Meeting next week, expected to leave rates unchanged, but France presents a bigger challenge.
04:58So what tools does the central bank have to contain the fallout and will whatever it takes extend to rescuing
05:03France?
05:04So one thing that the ECB can do is not to raise interest rates as much, reflecting the fact that
05:09monetary and financial conditions are tighter because of higher bond yields.
05:14There are, of course, a lot of other things that the ECB has at its disposal.
05:19There is the TPI, the transmission protection instrument.
05:22The problem with that, of course, is that they said that they would use that in the event of an
05:26unwarranted rise in bond yields.
05:29And one might argue that this is thoroughly warranted because it's a response to the fact that fiscal policy needs
05:37to be tightened and that the debt ratios are unsustainable.
05:42So I think that that could be difficult to use as the OMT, outright monetary transactions, something which Mario Draghi
05:49put in place back during the sovereign debt crisis over a decade ago.
05:54And, of course, these are the options that the ECB has and that countries have to go to the ECB
05:59and request them.
06:01So I think there are a few things that can happen, but I think it might be a while until
06:06we get to that point.
06:07Spreads probably need to rise even further to get to that point.
06:20The scream, neighbors, neighbors.
06:24We, thank God, even there is no one of this rapes.
06:27The neighbors were killed because it was a bombshell.
06:30Everyone has a hope that this war has to end, but in any way, I don't see any advice for
06:38that, to have to end it.
06:46I don't believe.
06:47I can't believe that Putin is not agreed to any of these negotiations, any of these actions.
06:56If Zelensky is already agreed to, even if he is agreed to do the same part of the territory, I
07:03don't think that Putin is agreed.
07:27I don't believe that Putin is right there, that Putin is right there.
07:29In the sense of public policy, Putin is not agreed to progress, but there are other people who run into
07:29the territory of cooperate.
07:29The leader of the leader of the leader of the leader of the leader of the leader of the leader.
07:29As a leader of the leader, Putin has continued confidence in the leader of the leader of the leader of
07:29the leader of the leader of the leader of the leader.
