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Charles Gave: "Get Out Of Banks, Get Out Of France - Get Out Of The Euro"

Tyler Durden's picture


Authored by Charles Gave of GK Research, A Gavekal Company,

Last month we laid out the reasons why France was On The Brink Of A Secondary Depression—in short, due to a deadly collision of French politics with Frankensteinian monetary union. Unfortunately, subsequent data confirms the bleak trajectory:

The INSEE Business Climate Survey has fallen below 88 (or two sigma below the mean). This indicates France is entering into a recession as nasty as 1993 and perhaps as nasty as 2008-2009. She will enter into this recession with government spending at 57% of GDP, an all-time high, and with a debt-to-GDP ratio close to 90%—and that’s not including the liabilities for civil servant pensions. If they were included, the debt to GDP ratio could double, according to some estimates (see the report on public finances by Michel Pebereau).

Even Francois Hollande is beginning to wake up to just how destructive and anti-business the French agenda is. On Monday, Hollande announced measures designed to encourage the French entrepreneurial spirit - essentially by watering down programs he himself imposed after winning the presidential election last year.

The new agenda includes cuts in capital gains taxes. The effective capital gains tax will now decline by 2 percentage points, to 32.5%. This is better than last year’s outlandish move to effectively bump up the capital gains tax to as high as 62% in some cases. But the president’s reversal is the desperate move of a cornered politician, not a sign that we will see a steady hand on the tiller of reform in coming years.

Take a look at the table above. France is a serious laggard against most of the other major European economies (except Italy) on almost all tax indicators.

  • Between 2000/2011, the overall tax to GDP ratio went down about -1.6 percentage points across the European Union: -2.6pp in Germany, -1.4pp in the UK, and -7.2pp in Sweden. In France it contracted by just -0.3pp. France is now poised to overtake Sweden as the most heavily taxed major country among the 27 nations in the European Union, with an overall rate of 44% vs 39% for the EU as a whole.
  • French implicit taxes on capital gains rose by 4.3pp in 2000-2011, an increase surpassed only by Italy and sharply at odds with the declining trend in Germany (-5pp), the UK (-9.1pp), Sweden (-16pp) and the Netherlands (-7pp), not to mention euroland as a whole (-2.7pp).
  • In absolute terms French implicit taxes on capital are a gigantic outlier at 44.4%, compared to an average of 27.2% among the 17 nations in the euro area.

In this context, Hollande’s reversal on capital taxes reminds me of the guy walking up the steps to be hanged, who slips, falls and says “could have been worse.” France remains one of the deadliest environments for entrepreneurs.

Debt trap

As France crashes into a secondary depression, tax revenues will shrink and automatic stabilizers will kick in. The French budget deficit is going to explode upwards. See the chart overleaf: the recession in 1980 saw the primary balance deteriorate by 2% of the GDP, and the 1993 recession led to a deterioration of 4%. By 2008-2009, the stakes had risen to 6%.

If we compute the average deterioration for the last three recessions, we get a 4% target, which would take the French primary deficit by the beginning of 2014 to 7% of GDP (that is more than 16% of the private sector GDP). If we instead extrapolate the trends (2, 4, 6...) we arrive at a primary balance equivalent to 11% of GDP, which is not to be ruled out since, as I have already said, France is going into a depression.

Needless to say, the government “forecast” of the budget deficit falling this year and next is totally risible, and on par with forecasts made by the Spanish or Greek governments over the last few years.

Typically, the cost of borrowing rises as a country sinks deeper into the quagmire: thus the “trap” in debt trap. It should be noted this time interest rates are very low in France, and may remain so. But even so, French debt ratios will keep exploding, since the growth rate of the nominal economy will be much lower than the average interest on public debt. See the black bars on the chart below: this will surge big time. Moreover, this will occur around a time (2015) when, the past debt issued to deal with the economic collapse of 2008-2009 will become due.

France may thus have to issue debt equivalent to a large percentage of her declining GDP (15% to 20%?) year after year and for the foreseeable future.

Knowing this, why then are French rates so low? The usual explanations (purchases by the Swiss National Bank and Mrs. Watanabe buying) have some merit, but other factors may also be at play. France has a large financial sector, with huge international positions. Some entities may be selling international holdings which demand large reserve requirements. The proceeds are then brought back in France to buy French government bonds—against which there are no reserve requirements.

The economic impact of such a trend would indeed be benign for interest rates. But ultimately, it raises the risk on the French financial balance sheet: less diversity, and more vulnerability to a problem with the local sovereign.

In any case, in a bond market, one should look at two things: the return ON capital and the return OF capital. The return ON capital is pitiful and the return OF capital is far from certain. Sell the financials in Europe - and in France especially.

Really, the euro is on its last legs. France is in play.

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Mon, 05/06/2013 - 09:06 | 3533835 jubber
jubber's picture

10y France presntly at ATL 1.69%

Mon, 05/06/2013 - 09:14 | 3533848 flacon
flacon's picture

The financialization of people's minds has caused them to forget what the true meaning is behind the "assets" they buy. Take bonds for instance:


Most people (baby boomers especially) don't realize that a Government BOND is a contract of ENSLAVEMENT for their children's generation. Government BONDAGE. 

Most people think it's just a cute play on words.... but oh how WRONG they are! There is also no TREASURE in the TREASURY - except the slave contracts known as BONDS for the souls of the working man. 

Let the chips fall where they may.


(Ask the typical man-on-the-street 'investor' what a bond is, and where that interest is coming from... chances are they don't know the correct answer - all they know is that they receive interest from 'somewhere' and as long as they are receiveing interest they don't care to know)

Mon, 05/06/2013 - 09:17 | 3533864 BLOTTO
BLOTTO's picture

Mathematics says, "you can't escape"

Mon, 05/06/2013 - 09:25 | 3533886 GetZeeGold
GetZeeGold's picture





I knew there was a catch.

Mon, 05/06/2013 - 09:45 | 3533968 fightthepower
fightthepower's picture

The EU is a creation of the demonic Rothschild family.  It is a blueprint for the New World Order. 

Mon, 05/06/2013 - 09:59 | 3534028 HardAssets
HardAssets's picture

Sounds like Charles gave up.

Mon, 05/06/2013 - 09:27 | 3533889 Quinvarius
Quinvarius's picture

I never considered that the debt based financial system was based on the souls of present and future generations.  From a Biblical perspective, things make more sense.  I can now understand how a complete lunatic would get satisfaction from heaping endless debt onto the public if he were inclined to Satan worship.  More debt equals more souls for the overlord of the underworld! 

Mon, 05/06/2013 - 11:19 | 3534242 Bananamerican
Bananamerican's picture

Satan worship

It's hard for "modern people" to conceptualize that it even exists.

Italy is one its oldest stomping grounds...

There is a central force, or locus, of evil that exists as certainly as a God of light/creation does....

...and please snarkers dont bother to respond with atheist cracks or the usual Bernanke jokes...

You only come off like fish scoffing at the existence of the Ocean...

Mon, 05/06/2013 - 12:03 | 3534339 mirac
mirac's picture

Belgium is no slouch either-the home of the EU...

Mon, 05/06/2013 - 13:19 | 3534582 Hengist
Hengist's picture

Ah but if the fish was a Buddhist the ocean would be an illusion.  Mind you so would the fish itself but religion doesn't have to make any sense.

Mon, 05/06/2013 - 13:22 | 3534595 1000 splendid suns
1000 splendid suns's picture

...like the Vatican with their 'LUCIFER' telescope....

Mon, 05/06/2013 - 22:25 | 3535172 Muppet
Muppet's picture

I always believed 'evil' was a temporary behavior and that good intent lies within all men.

In my forties, I first encountered real people who worked everyday against good.  Not just temporary behavior, these were people dedicated and working everyday to earn profits by preying on the weak and exploitable.  They often laughed and enjoyed their work.  Truly evil.  (coincidently they were in NYC)

I've since told my kids that evil is not some concept, but in fact truly exists.  There are evil people.  I explained to my kids how heartbroken I was to learn this and so late in my life.  I told them that you can hope to avoid evil, but when it confronts you, you must run away from it.  You cannot try to accomodate it or think it will pass.  I am not overly regilious but I was moved to prayer.

Mon, 05/06/2013 - 09:29 | 3533904 Doctor of Reality
Doctor of Reality's picture

So true; and also true that MOST don't care who's paying into the PONZI, as long as they get more out than they put in. Who cares about our children and grandchildren... 

Selfish, shortsightedness... but when those in the age range of (18-38) see the PONZI for what it is, we may end up seeing "Logan's Run" and/or "Soylent Green". Sad.

Mon, 05/06/2013 - 09:37 | 3533937 kurzdump
kurzdump's picture

Money is debt. In the past money was used to "pay" tribute to the gods. Now its used to pay tribute to TPTB. Nothing has changed since then. Well, something has changed probably - people are not smart enough nowadays to realize it.

Mon, 05/06/2013 - 11:04 | 3533945 Peter Pan
Peter Pan's picture

People who invest in government bonds will be Cyprussed as there is no way that future gnerations can or will pay for poltician's unfunded promises.

Mon, 05/06/2013 - 09:21 | 3533876 DeadFred
DeadFred's picture

Just go beg Draghi for help and submit to IMF austerity and all will be well. No worries.

Mon, 05/06/2013 - 10:00 | 3534029 Fuh Querada
Fuh Querada's picture

The new yen carry trade

Mon, 05/06/2013 - 10:31 | 3534124 SheepDog-One
SheepDog-One's picture


Mon, 05/06/2013 - 09:07 | 3533837 Divine Wind
Divine Wind's picture




".... reminds me of the guy walking up the steps to be hanged, who slips, falls and says “could have been worse.”

LOL. Pretty funny.

Mon, 05/06/2013 - 09:08 | 3533839 Bearwagon
Bearwagon's picture

"The Euro is on its last legs" Bullshit! That sentence was "formulated by people who vastly underestimate what the Euro means for the Europeans, for the Euro area. They vastly underestimate the amount of political capital that has been invested in the Euro."  ;-)

Mon, 05/06/2013 - 09:16 | 3533861 InvestmentMind
InvestmentMind's picture

No Plan B.


Mon, 05/06/2013 - 09:53 | 3534003 Headbanger
Headbanger's picture

Plan 9 From Outer Space then?

Mon, 05/06/2013 - 09:57 | 3534020 Bearwagon
Bearwagon's picture

+1 for Edward D. Wood Jr. reference. ("Bride of the Monster" would also have been appropriate.)

Mon, 05/06/2013 - 12:57 | 3534519 Non Passaran
Non Passaran's picture

There's no plan A, let alone plan B!

Mon, 05/06/2013 - 09:23 | 3533883 fightthepower
fightthepower's picture

The EU was constructed as a method of enslaving people, destroying freedom.  Its going to go down in flames and cause another European war. 

Mon, 05/06/2013 - 09:33 | 3533918 GoldBricker
GoldBricker's picture

Or provide the US with an excuse to intervene and decide the outcome for the third time within a century. That's why there's been no war in Europe: not the EU or the euro, but the implicit US threat to knock heads.

Mon, 05/06/2013 - 09:25 | 3533888 andrewp111
andrewp111's picture

True. The EU won't  let the Euro go down without a lot of furious kicking and screaming. But the current order is on its last legs. To save the Euro, the EU must have true political union. If the remaining vestiges of State-level sovereignty remain intact, the Euro is doomed.  Within the next few years they will have to make a binary choice - complete political union or breakup.

Mon, 05/06/2013 - 10:50 | 3534180 Vince Clortho
Vince Clortho's picture

Political Union?

Does that mean that all the "citizens" of Europe will have the same slavemaster?

Mon, 05/06/2013 - 09:27 | 3533900 Oldwood
Oldwood's picture

As long as the hope of free money is alive, so will the Euro be. They really have no other path but to dream that money comes form heaven or at least Germany. To abandon the Euro would force them to look at their own empty pockets. So far they have only been willing to take a quick peek and they didn't like what they saw. So know they stand with false pride while they reach out with an empty palm, begging for a handout, and threatening that if they don't get it they might well break a few windows if not burn the house down. Detachment from reality tells me that the Euro will go until the very end, and a grim end indeed.

Mon, 05/06/2013 - 09:28 | 3533903 NoDebt
NoDebt's picture

There's my favorite quote!  They need to have that quote thown in their faces over and over and over again.  Arrogant bastards.


Mon, 05/06/2013 - 09:31 | 3533908 GoldBricker
GoldBricker's picture

Political capital? Invested?

So, what's the current risk-free rate of return on political capital? Can it be used as Basel 3 collateral?(actually, it probably can, if Greek bonds can)

I say this only to emphasize that this is a nonsense word, one of many which are coined, tossed out to a compliant media, which then repeats them without asking for a definition. The presence of such words indicates a slogan, not an analysis.

A lot of political capital was invested in the League of Nations, Bretton Woods, and even Solyndra. But when the financial capital dried up, those projects disappeared into thin air.

Yes, the euro is great for cross-border travel within the zone. Beyond that, it seems a lot shakier than it did just 5 years ago. It's not dead yet, but the direction of the trend is clear. What's the long-term scenario in which this all works out? Please provide links from the political capitalists.

Mon, 05/06/2013 - 09:32 | 3533913 Bearwagon
Bearwagon's picture

I don't know if you have read this: http://www.zerohedge.com/news/2013-04-04/mario-draghi-responds-zero-hedg...

So I repost it just in case.

Mon, 05/06/2013 - 09:45 | 3533967 youngman
youngman's picture

What amazes me is how the EURO is still at  a 1.30 to 1 range and not a 1 to 1 range.....way over valued I think...I was in italy when it was .88 to 1 in 2001......Italy was better off then I thought...

Mon, 05/06/2013 - 11:07 | 3534218 desirdavenir
desirdavenir's picture

yeah me too... Except you forgot the 0, I guess you mean 1€ = 10$... If not now, at least it will happen once the Fed will have printed the way out for the US banks. Also, remember that in spite of 0 growth for 20 years, 1$ = 160Yen. So even with the currrent figures, Japan's growth in USD terms is more than 2%/annum. It's true that Eurozone is taking the same road as Japan, but at least we won't destroy our currency in the next 5 years.

Mon, 05/06/2013 - 09:52 | 3533991 Boeing Boy
Boeing Boy's picture

Means fu*k all to me and I am european.

Mon, 05/06/2013 - 10:05 | 3534055 Fuh Querada
Fuh Querada's picture

Presumably you mean political/financial elite force. No EUR zone country whose debts would be devalued, or derivative positions impaired, by returning to a national currency will be allowed to leave. Period!
I have never seen an analysis of precisely WHO would have to do WHAT and WHEN for a country to leave the EUR currency zone. Proabably with good reason.

Mon, 05/06/2013 - 10:08 | 3534063 Bearwagon
Bearwagon's picture

I think you got me right. NO Plan B. Period!

Mon, 05/06/2013 - 10:32 | 3534125 orez65
orez65's picture

What the Euro means to Europeans and what the Euro is are two different things.

I just returned from Spain and found Spaniards, in general, would like to stay with the Euro.

But they can't explain the reason that they are losing their jobs, aka the Euro.

Mon, 05/06/2013 - 10:52 | 3534184 Vince Clortho
Vince Clortho's picture

Are Spaniards as brainwashed as Americans?

Mon, 05/06/2013 - 11:01 | 3534205 desirdavenir
desirdavenir's picture

the reason they are loosing their jobs is the same reasons americans working in homebuilding lost their jobs: extremely bad gvt policy lead to a bubble that attracted millions of workers, and when the bubble popped these workers had not jobs anymore. 

Remember, during its high growth years, Spain alone was constructing as many home as Italy, Germany, and France combined. If you think that leaving the euro will make real estate construction boom again, please explain how !

Mon, 05/06/2013 - 09:11 | 3533846 francis_sawyer
francis_sawyer's picture

"Reports of my death have been greatly exaggerated"

~Sincerely, THE EURO

Mon, 05/06/2013 - 09:12 | 3533851 fonzannoon
fonzannoon's picture

Looks like someone talking his book loudly.

Mon, 05/06/2013 - 09:28 | 3533901 gjp
gjp's picture

+1 Fonz.  I'm tired of all these financial masters of the universe shouting from the rooftops about all the problems in this country or that country.  The problem is absoultely global, and the lynchpin is the US dollar.  Shut up about the Euro already, it's a sideshow.

Mon, 05/06/2013 - 09:40 | 3533953 TeamDepends
TeamDepends's picture

Yes, this is a global problem.  However, US and European banks are joined at the hip.  So when the Euro dies, the Yankee Dollar will last approximately two weeks before it is also relegated to the dustbin of history.

Mon, 05/06/2013 - 09:15 | 3533856 The Abstraction...
The Abstraction of Justice's picture

Time for France to cut its budget, a good start would be to send home its third world foreigners.

Mon, 05/06/2013 - 09:34 | 3533920 swiss chick
swiss chick's picture

and a third of the government workers...

Mon, 05/06/2013 - 10:34 | 3534130 orez65
orez65's picture

"... a third of its government workers ...??!!

How about 90% of its government workers!

The same thing that we need in the US.

Mon, 05/06/2013 - 10:57 | 3534194 americanspirit
americanspirit's picture

Government 'employees' perhaps, or government 'timeservers', but government 'workers'? Not a chance.

Tue, 05/07/2013 - 00:36 | 3536667 Tapeworm
Tapeworm's picture

BBBbut they'll starve to death. Do you want that on your concience?

Mon, 05/06/2013 - 11:58 | 3534323 Floodmaster
Floodmaster's picture

One state worker cost more than a whole Rom/Gypsy camp.

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