Poor Barnier is gone. And the markets are treating a rudderless France with equanimity. The Euro is at 1.05 to the USD and French 10 yr Sovereign debt is static yielding 2.05% with an unchanged 84 bp spread to Bunds. And CAC futures are up a tiny bit. That was the crisis that was!
Well hold on now!
My take is this.
1. The level of debt and deficits in the world has created top cover for France which has lower figures for both than the US. Sovereign debt crises are simply not all the rage among traders.
2. Central Bank Policy rates are falling and more in EU than in the US. It is hard to make a good sovereign debt crisis out of cheaper debt.
3. Investors are thinking that the caretaker government (of whatever ilk) that follows Barnier will be a business as usual affair,
BUT...
4. The fall of Barnier and the end of fiscal reform in France is like a trail of powder in a cartoon that leads directly to the big black bomb which is the inevitable July election.. (It could happen earlier but only if Macron quits - which Le Pen is aiming to force him to do). That will be the big boom when Le Pen or Melenchon becomes President and sparks an EU crisis by ditching the EU Commission's Excessive Deficit Procedure. What the fall of Barnier has done is to put the tape to the powder trail and make the coming crisis inevitable
5. Investors who think a caretaker government will be a kind of snot grey business as usual story are wrong. The deterioration in France's economy (who is going to consume or invest in this political and economic vacuum?) and in public finances is going to make things much worse come July and almost impossible to fix under either of the potential populist leaders.
I keep my target of the spread on OATS going to 120 bp to Bunds and the Euro being at parity to the USD. Germany might emerge as the deus ex machina to save the Euro (see Germany - A Casket Case Nov 12). But a lot has to go right for that to happen.
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