Economists: Le Pen Victory Would Lead To "Massive Sovereign Default", Global Financial Chaos

Tyler Durden's picture

With two months left until the French election, analysts and political experts find themselves in a quandary: on one hand, political polls show that while National Front's Marine Le Pen will likely win the first round, she is virtually assured a loss in the runoff round against either Fillon, or more recently Macron, having between 20 and 30% of the vote; on the other, all those same analysts and political experts were dead wrong with their forecasts about both Brexit and Trump, and are desperate to avoid a trifecta as being wrong 3 out of 3 just may be result in losing one's job.

Meanwhile, markets are taking Le Pen's rise in the polls in stride, and French spreads over Germany are moving in lockstep with Le Pen's rising odds. In fact, as noted earlier in the week, French debt is now the riskiest it has been relative to German in four years.

Why are markets spooked? 

As per her recently released manifesto, Le Pen has promised to unilaterally take France out of the Euro within six months, sparking concerns over what might happen then. The answer comes from the National Front itself, which overnight revealed its plans to the FT, suggesting that €1.7 trillion of French public debt would be redenominated into francs if the far-right National Front party gets into power.

Call it Yanis Varoufakis' dream scenario.

As the FT reports, "in comments that are likely to amplify fears about the impact of a FN victory on the global financial system, several senior-ranking party members have told the Financial Times that in  power the far-right would seek to redenominate about 80 per cent of the France’s €2.1tn public debt — the part that was issued under French law — in a new national currency. Confirming that Le Pen's party had extensively studied the topic, David Rachline, FN’s head of strategy, said in an interview that only about 20% of France’s total public debt “falls under international law [and would stay denominated in euros] . . . but for the rest we will have the right to change the currency”.

So with the green line in the chart above continuing to rise, a potential currency redenomination and "Frexit" on the table, and with memories of "impossible" events like Brexit and Trump quite fresh in everyone's memory, the time has come to bring out the big scaremongering guns, starting with the rating agencies, and sure enough they did not disappoint, because as quoted by the FT, an event envisioned by Le Pen would, according to rating agencies, be likely to amount to the largest sovereign default on record, nearly 10 times larger than the €200bn Greek debt restructuring in 2012, threatening chaos to the world financial system on top of the collapse of the single currency.

Moritz Kraemer, S&P’s head of sovereign ratings, said in a statement that this would be a default. “There is no ambiguity here . . . If an issuer does not adhere to the contractual obligations to its creditors, including payment in the currency stipulated, [we] would declare a default.”


Alastair Wilson, head of sovereign ratings at Moody’s, said they would consider any country leaving the euro to be in default if changing the currency of its debt caused investors to lose out financially relative to the original promise. “The test for us is: do we think investors will be able to get back the value they put in, when they expected to get it back,” he said.

The FN's Rachline said French debt would be redenominated on a “one franc to one euro” basis. But he added that reintroducing a national currency that could fall in value against the rump euro would lower France’s total debt burden. “[Having our own currency] will allow us to do a competitive devaluation,” he said.

Again, this was precisely the scenario contemplated by Vaourfakis, until he realized that the ECB has full control over the Greek banking system and the population's euro-denominated deposits: there simply was not enough cash for the Greek people if everyone decided to withdraw funds, which is what ultimately killed the Varoufakis revolution.  And to think that fractional reserve banking would have been understood by now.

It is unclear if Le Pen, or the FN, has planned for this contingency yet: it would be silly not too less than two years after the Greek 2015 fiasco. Nonetheless, the process is distinctly possible. Lawyers contacted by the FT said the currency redenomination for the bonds governed by French law would be theoretically possible because any nation can change its own laws. This means that bondholders would struggle to pursue France in the courts in the same way they pursued Argentina after its default in 2001.

Matthew Hartley, a debt capital markets partner at Allen & Overy, said: “Because the bonds are governed by French law, they just have to change French law to change the terms of the bonds.

Meanwhile, just in case rating agencies were not sufficiently convincing, mainstream economists - because their reputation is obviously much higher - also chimed in, arguing that France leaving the euro would cause chaos in Europe. Benoît Cœuré, executive board member at the European Central Bank, this week said that leaving the euro would lead to “impoverishment”, higher interest rates, a heavier debt burden, unemployment and inflation.

The European Central Banker will likely be even more angry when he learned that Le Pen plans on doing what the Developed World's central bank would love to do, but are - for the time being - stopped: deploy helicopter money. The FN has said that, following a shift back to the French franc, rules governing the country’s central bank would be changed to allow it to directly finance the French state, for example servicing French welfare payments and government debts.

Leaving the euro is just one pillar of the FN’s economic strategy, which is focused on making French industry more competitive, taking a page right out of the Trump playbook. However, since France does not share the US' exorbitant privilege of the global's reserve currency and world's strongest army, France - unable to bully its trading partners, hopes that a fall in the value of the new national currency will boost exports.

The second thrust of the party’s economic policy is to use “intelligent protectionism” to allow them to defend French industries — something that they are currently prevented from doing by EU rules, says the FN.


One senior official said it was a return to the politics of postwar head of state Charles de Gaulle, who kept a tight hand on the French economy. “We are not extreme, we are Gaullists,” said the person, who did not want to be named.


This dirigiste strategy would see them imposing trade barriers on any “unfair competition” from abroad, according to party officials. There would also be a 3 per cent import tax on foreign goods that would be given as tax breaks to the poorest.

For now, it is unclear whether Le Pen will win or not: there are two more months to go, and even with her rise in the polls against scandal-ridden opponents, one can debate if she has enough support to win. But no matter the outcome, Mikael Sala, the head of Croissance Bleu Marine, a think-tank supporting the FN, summarized it perfectly when he shrugged off concerns that the redenomination of the currency would be considered a default by the rating agencies. “We will be elected by the French people — it is not our job to please [the rating agency] S&P,” he said. “They do not have much credibility after the financial crisis anyway.”

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bwh1214's picture

When have we heard that before.


froze25's picture

Was just about to say that same thing. I guess she is going to win.

mofreedom's picture


God Bless France...but please learn to speak English...i know you know how.

I love France.


Never One Roach's picture

i already sent my donation to her campaign even though relaibale accurate CNN says she has less then 2% chance of winning.




BullyBearish's picture

She wins and the CAC is up 30% overnight...

mofreedom's picture

This is bearish manure spreaders.

I love how the French handle a manure spreader aimed at a .gub building.


Stuck on Zero's picture

All those economists should pack up and leave if she's elected.

Raffie's picture

I don't think there is a country that will ever pay off its debt and the central banks like to have nations in debt to them forever.

Hope she does win and defaults and I hope USA defaults. Going to hurt like a mofo, BUT in the long run will pay off.

archon's picture

They said the same thing about Trump.  Vote Le Pen!

eatthebanksters's picture

The sky is falling, the sky is a falling...

Chief Wonder Bread's picture

I saw an interview the other day and I like her. She's got that smokey whiskey voice so attractive in a mature woman.

Dormouse's picture

When the global elites squeak, I'm sure that chick is the right choice.

SoDamnMad's picture

Yeah , sounds like the Brussels leaders and German bankers won't be getting their huge bonuses. GREAT

bigkahuna's picture

If France wants to be France again - then lets do this.

Lies All Lies's picture

Do try to separate your thinking mode from your groin. Otherwise, carry on..

4 wheel drift's picture

why should the USA pay off a debt that was put in place (at least half of it) by an irresponsible traitor

son of a whore ?  the tax payer ought to revolt and tell Trump...  'we need re-structuring under the

protection of a modified bankruptcy to accomodate for partial dischrge of the insane debt the country

is under".  and frankly, given the alternatives of ... doing nothing... the  'hurting' may not ba as bad as


Chris Dakota's picture
Chris Dakota (not verified) Raffie Feb 11, 2017 9:29 PM

I looked at her chart, very dynamic, very fated and she is going to win.

you can take that to the bank!

JackT's picture

I donno. Too much French schemin' to actually work. At some point the debt chain breaks and everyone will have to take off their beret and take a haircut.

The_Passenger's picture

Denominated in French Francs... 

Hoi Polloi's picture

The very same words the economic "experts" used for Brexit and we know how wrong they were...

AlaricBalth's picture

Google "Brexit would lead to" using parentheses.
It's almost comical, yet maddening to see the fear mongering.

Here is a sampling...

Now Cameron warns Brexit would lead to war and genocide

Brexit would lead to reduced trade, employment, output, productivity and investment, permanently lower incomes, a permanent ..

Britain's exit from the European Union would lead to the “ implosion” of the continental bloc

.. that Brexit would lead to a decline in economic activity, we naturally expect that Brexit would lead to job loss too.

The_Passenger's picture

Have you concidered the time horizon though? Not saying you are wrong, but implosion of the continental bloc looks imminent though...

knukles's picture

Lemme see here ....

Nothin' left but the wrappers!

mofreedom's picture

Merkel is counting her tampoon war bond tickets to cash in for some ky jelly.

kentmills's picture

EU - see what I did there ;)

MaxThrust's picture

Greece will be the last one to leave.

SoDamnMad's picture

He who leaves first, leaves best.  Germany missed zee boat.

Raffie's picture

Well Germany is the engine of Europe.

So, once the engine goes the EU (will be the PU) will cost to a full stop.

Troy Ounce's picture


Burn the fucking place down!!

BurningFuld's picture

I wonder. If I lived in France would I be converting all of my Euros into Gold? Nah, dumb fucking idea.

BabaLooey's picture
"Le Pen Victory Would Lead To "Massive Sovereign Default", Global Financial Chaos, Economists Warn"

.....................anybody else laughing their asses off at that headline?


sixsigma cygnusatratus's picture

It would be like saying Madoff victims only lost money because regulators started looking into his ponzi.  If regulators had left it alone, no one would have lost money (yet).

sixsigma cygnusatratus's picture

I'm thinking more that "Massive Sovereign Default", Global Financial Chaos could lead to "Massive Sovereign Default", Global Financial Chaos." What's Le Pen got to do with it?

BurningFuld's picture

Le Pen would be revealing the giant fucking ponzi currency fraud. That is all. She better fucking win!!!!!!!!!!!!!!!!!!!!

Budnacho's picture

It would be nice if they would at least get a new script to read bullshit from....

mofreedom's picture

Duh, they're leftists who haven't had a fresh idea since Marx and Lenin. Crash and Burn baby!!!

And kill undesirable babies. Nomen to that/

mofreedom's picture

Somebody here likes killing black children.

Obama, is that you?

Please stop it.

sinbad2's picture

Exactly, they keep running the same failed routine over and over again. That alone should be enough to send the current crop of aristocrats to the chopping block. The world is run by these people, and they are totally incompetent, just dispose of them and get new rulers.

BandGap's picture

An no mention of dogs sleeping with cats......

cowdiddly's picture

Ah Ye Olde Faux Poll and sky is falling routine. AGAIN?

Geeze guys find a new plan, that one hasn't been workin out too good.

Tipsy's picture

Economists?  Sounds like a The Onion headline:  "Area man warns that a Le Pen Victory Would Lead To Global Financial Chaos"

booboo's picture

If Florida Man hasn't said it I don't believe it.

Sonny Brakes's picture

It's what's needed.