A blow to its credibility to investors will bring possible rejection of it , says CEO and head of research at Axiom Alternative Investments, Mr. Jerome Legras, in an article in the Financial Times. Legras says that markets are so common to face repeated fears of Washington’s shutdown that U.S. government bonds sometimes increase amid such tensions, even because government bonds are considered a refuge in times of turmoil. But markets are unlikely to grant France such generosity if the current debate on the national budget leads to its rejection by parliament. The analyst points out that we already have a preview of a possible reaction with the difference in the yields of the French state debt against the German expanding to the highest levels since the eurozone crisis while at some point, the yields of the French reference bonds increased for a while above those of Greece. He recalls that Prime Minister Michel Barnier used the constitutional process “take it or leave it”, the notorious Article 49.3, which allows the government to bypass lawmakers. But this will cause a vote of mistrust in parliament and if it is lost, the budget will be rejected. What if the budget was rejected? Jerome Legras says that although no one can explain clearly what the process is to go through this matter with the payment of state expenditure, it is a concern. The essence of the problem is that the key parts of the Constitution – Article 47 and Article 45-4 of the Financial Law – concern mainly delays in the submission or voting of the budget. There is no clear rule on rejected budgets, except that no debt cannot be registered without Parliament’s approval. The only generally similar case occurred in 1979-1980 and was resolved by last-minute law and decision of the Constitutional Court. Obviously, the political cost of rejecting budgets will increase in the fear of default, but with political irregularities continuing, risks and risks are high. According to Article 16 of the Constitution, President Emanuel Macron could – probably – argue that the continuity of the French state is at stake and impose a budget by presidential decree. This “threat” could be enough to ensure that it does not become a shutdown and that parliament has every incentive to find a solution, even in the short term. But none of this will find a response to the markets, he points out. Two rating agencies have already put France in a negative position. A constitutional crisis could cause an early degradation. With French bonds assessed with AA- by S&P already negotiating at the same level as the Greek state debt assessed with BBB-, the analyst estimates that the impact of a reduction will be sluggish. As regards EU banks, it estimates that around 93% of their exposures are recorded as ‘costs’ and are therefore immune to market volatility. Thus, banks have the luxury of waiting for a longer-term solution instead of crystallizing any sales losses. It also does not consider that the European Central Bank or the European Commission will change course. The Commission supported the proposed French budget and is not expected to comment formally until a young man is fully approved by parliament. As far as the ECB is concerned, the final ‘applicant’ of the Eurozone sovereign bond markets, fears of closure would provide a logic for market intervention and support for bond prices. But the ECB could well expect a slight volatility to help French politicians tidy up before interfering. How will investors react? Investors are a different story. Long-term, ‘real investors’ in government double rating bonds A (life insurance companies, Japanese banks, etc.) hate uncertainty as they want predictable returns while short-term, speculative investors love to play with these fears and prejudices. As Jerome Legras says, the main issue with a failed budget will be the absolute complexity of the situation. Political turmoil, without a stable government, will make communication extremely difficult and markets unstable. Long-term damage to market reliability could be significant. In conclusion, it is noted that the march towards the new year without a budget and with a service government trying to convince that debts will be paid somehow, will remind the French of the famous phrase in Mathieu Kasovic’s film, “Hate”, which tells the story of a man falling from a 50-story building: “So far, everything’s fine. But what matters is not the fall, but the landing.” The good news is that the EU has always been better at managing landing than it is at falling.
A rejection of France’s budget will affect investors’ credibility
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