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France Seeks Forbearance

Marc To Market's picture




 

French President Hollande, fresh from a stunning defeat in local elections is signaling that he will once seek the EC (and Germany's) forbearance to relax the fiscal rules yet again for the euro zone's second largest economy.

Yesterday INSEE reported that France's 2013 budget deficit was 4.3% of GDP.   This overshot even the revised targets.   A year ago, France committed to a 3.7% 2103 deficit.  In September, it had been re-set to 4.1%.  Last summer, the EC gave France an extra two years (2015) to bring its deficit to the mandated 3% of GDP.

France is likely to overshoot this year's 3.6% target.  In the press conference following the election results, Hollande seems to lay the groundwork for what he will tell the EC in mid-April.  He is to provide details of the 50 bln euro in spending cuts, in 2015-2017 and a 10 bln euro in the payroll tax.  All told, Hollande plans to cut 30 bln euros charges for French businesses.  As is well appreciated, the French government spends the equivalent of 57.1 % GDP, which is among the highest in the world.  Revenue from income taxes is just less than 46% of GDP.

Hollande will ask for more time.  He said, "There can be no question of undermining growth that is just returning."  He wants his new prime minister Manuel Valls, from the pro-business  wing of the Socialists, to convince Europe that France's "contribution to competitiveness and growth" is more important than the fiscal commitments.

Vall's appointment itself is part of the Hollande's peace offering.   Valls is a fiscal conservative, if that label means anything in the context of French politics.  He advocates enshrining the 3% deficit target into the constitution.  In previous campaigns, Valls had advocated state support for small businesses, the end of the 35 hour work week and an increase in the minimum retirement age.   To solidify the pro-business thrust, the controversial industry minister Monteborg may be dismissed.

Despite the rhetoric about having to act to head of advances by the National Front, Hollande's biggest threat comes from the revival of the center-right UMP.   Le Pen's National Front did do well in the municipal elections, in the context of its own history, but it drew only 7% of the popular vote (and that is with a relatively low turnout) and won 12 municipalities.  The UMP won 572 municipalities with populations in excess of 10,000.  The Socialists won 349.   Moreover, the National Front lost two cities that it had led in the first round (Avignon and Perpignan) and lost Forbach, where the party's number two (Florian Phillpport) ran.

The rebound in France's PMI is in fact encouraging.  The manufacturing index had been below the 50-boom/bust level since July 2011, and today's report confirmed the recovery to 52.1 (51.9 in the flash reading and 49.7 in February).  However, last week the government reported a new high in unemployment.  The EC's 1% GDP forecast this year is still at risk.   French banks' forecasts are generally below this, with some expecting half of this pace.

One could not tell from the performance of French bonds that they are nothing but somewhat higher yielding German bunds.  The premium France pays over Germany stands near 53 bp on 10-year bonds.  This is 10 bp less than at the start of the year.    France pays about eight bp more than Germany on 2-year paper.   Large pools of capital, like reserve managers and insurance companies, who appear to be among the more significant holders of French debt, seem to believe that when push-comes-to-shove, France will be kept in the core. 

Ironically, the buying of French bonds by these large pools of capital have eased the pressure on the successive French governments from truly reforming.   German had the fall of the Berlin Wall to provide, after a time, impetus for reform.  Many peripheral countries have been forced by the financial crisis (and Germany and EC) to reform.  France had the luxury of neither.  The relatively low bond yields (and a CDS that is below 50 bp) gives French officials little sense of urgency.

 

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Tue, 04/01/2014 - 19:10 | 4615374 falak pema
falak pema's picture

Forbearance translates into financial foreskin loss for the banks and the Eu is getting hopping mad with France. But...

France is now very much part of Pax Americana geopolitics in ME/Russia/Africa stand-offs and so plays Hollande, to ask for more slack to allow his statist strategy to readjust at a pace that saves his poltical skin for 2017 re-election. (yes our politicians only think of their own personal foreskins). 

Notwithstanding their egos, and the longer term geopolitics of East -West standoff, if the Euro goes kaput in the interim period then say goodbye to the global banking system and reserve.

Concentric rings of ponzi; unless the West finds relief in Armageddon or miraculous growth. 2014/2015 seem crucial to test if the Reserve and Euro / Yen etc. can stand all this geopolitical drum beating and its consequent fall-out on financial front (like financial war with Russia and Turkish delights of Erdogan-bashing or Erdo-laudinG and Nato sabre rattling in Caspian). 

The East West structural divide can only get bigger as the reserve has no true legs to it on both sides of the pond.

But this current French government change recognises that Renzi has changed the tune in Italy and the pace; so France has to follow suit IN THE SAME NEO LIBERAL TAX REDUCING AND BUDGET TIGHTENING DIRECTION. 

Mutti of course says she will save Germany and those who agree to her in Europe by BAIL-INS of banks. This is a concern for Draghi and the international Squid operation. THEY DON'T WANT BAIL INS.

Take your pick in this mad Preakness to Arc de Triomphe continental race now hotting up.  

 

Tue, 04/01/2014 - 17:57 | 4615233 SILVERGEDDON
SILVERGEDDON's picture

"Let them eat cake"

And, leg of bureaucrat, with Hollande-aise sauce.

Euro ship just sprang another leak.

Like the Titanic, ship is going down, smart motherfuckers are in the lifeboats, and the peasants are on the poop deck with the orchestra playing. 

Tue, 04/01/2014 - 12:23 | 4613978 DeadFred
DeadFred's picture

Well if the 3% target is enshrined in the constitution that means it will be followed right? Who would ever violate the constitution?

Tue, 04/01/2014 - 11:10 | 4613776 Doubleguns
Doubleguns's picture

The 3% spending rules only apply to those wishing to join the EU unless you use goldman sacks to do your accounting then its a pass. 

Tue, 04/01/2014 - 10:43 | 4613672 Manthong
Manthong's picture

Aw.. it's all BS as even 3.7% overspending has been against the rules of the EU deal since the get-go.

Tue, 04/01/2014 - 17:01 | 4615078 negative rates
negative rates's picture

When there is no end in sight, there is no need for urgency.

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