"Friday tidbits from the FT" ..... OR ..... "Don't let it ruin your weekend"

"Friday tidbits from the FT" ..... OR ..... "Don't let it ruin your weekend"

"Le Pen plan to redenominate debt into francs threatens huge default" , International

Earlier this week we were taking a look at how the spread between the yields on German and French government debt had widened in recognition of the risk of an "against-the-odds" victory for Marine Le Pen in the French presidential elections. We should stress again that the accepted wisdom is that the National Front (FN) leader will make the second and final run-off between the two leading candidates, but will lose in the second vote as supporters of the mainstream political parties combine to elect whoever her opponent may be. The trouble is that faith in accepted wisdom is not what it once was, and after the shocks of Brexit and the Trump win it would be foolish not to take some protection against another populist upset.

The FT (and many other news organs) concentrate today on what an unlikely Le Pen victory would mean for France's debt, and for anxious holders of French government bonds. The FN has been absolutely clear about leaving the Euro, and whilst any new government would be unable to change the terms on bonds that fall under international law, they would certainly redenominate government bonds governed by French law from Euros into "New Francs" (we'll call them for now). This accounts for fully 80% of France's government debt.

For many investors, and ratings agencies, this amounts to a DEFAULT.

Moritz Kramerof Standard and Poors has put it on the record that : "If an issuer does not adhere to the contractual obligations to the creditors, INCLUDING PAYMENT IN THE CURRENCY STIPULATED, we would declare a default" . As he also pointed out, this is pretty unambiguous. At first glance, Moody's might seem a touch more equivocal in saying that their test will be whether investors lose out financially relative to the original terms of the bond. In other words, will the investors get back what they were promised when they expected to get it ? But since David Rachline of the FN has said that after redomination on a "one franc to one euro" basis the government could then pursue a competitive devaluation, it seems a pretty sure bet that holders of bonds newly denominated in francs would lose out.

Lawyers advise that the courts will not be an obstacle to changing the terms on any debt governed by French law, as any government has the right to change laws. Moreover, the FN is unlikely to be too bothered by the judgement of ratings agencies, who they portray as being without credibility after failing to send out the appropriate alarm signals before the financial crisis.

In the unlikely but not impossible event of a Le Pen victory one thing is certain ..... chaos. Could the Euro survive a withdrawal of the French ? And what about the EU itself ? The FN tends not to describe itself as extreme these days, but at the same time is committed to protectionism to defend French industry. This would be expressly against EU rules. Even the Brussels mandarins might struggle to put together enough fudges to keep the EU intact in those circumstances.

Oh well, it'll probably never happen ......

"Conflict over Athens surplus needles the IMF" , Leader

Another topic we covered was the upcoming deadline for Greece to negotiate further help from its creditors to enable it to make a repayment of over Eur 6 bln in July ..... that's a lot closer than it sounds as domestic elections within Europe, and the nationalistic sabre-rattling that they're likely to engender mean that the time for serious negotiation is strictly limited.

We know that this is not a simple (relatively speaking) issue of debtor against creditors, as the creditors are split on what terms to impose on Greece for their continued support. Not only does the IMF think that some debt write-off is essential, a move thoroughly opposed by the EU, but it believes that the fiscal targets set by the latter for Greece are too high. A primary budget surplus, which excludes interest payments, of 3.5% of GDP is the condition laid down by the EU for further aid. The IMF think that a figure of 1.5% is appropriate.

To this insignificant eye, it has long seemed as though the EU's demands are not only unrealistic but border on the punitive. One can't help feeling that the stance taken by some of the Eurozone governments is dictated by domestic political agendas, especially in this year of elections. Our view won't bother them one bit, and they're right in thinking that further hand-outs to irresponsible Greece (as they see it) will not play well in places like Germany and the Netherlands.

Anyway, now it turns out that there's some conflict within the IMF itself with European directors on the board siding with their countrymen at the higher surplus number, while everyone else goes with the lower figure. The FT Leader points out that whilst it's true that Athens does have a long and regrettable history of economic mismanagement, Eurozone governments have themselves behaved pretty poorly on this issue. It calls on IMF representatives from the rest of the world to overrule a European contingent whose judgement is clouded by self-interest.

"Asia forex watchers await Trump's launch of the renminbi tweet" and "Fairway talks run risk of landing yen in bunker", Markets and Investing

Just quickly (because we've been here recently too), two articles revolving around two nations coming under splenetic attack from President Trump for their activities in foreign exchange markets ..... which of course is to say their engineering of a cheaper currency to gain a trade advantage.

In the first, Jennifer Hughes examines the China situation. It's no secret to anyone (apart possibly from Mr Trump) that China has taken a number of forceful measures to support the yuan / renminbi, including spending $1 trillion of its foreign exchange reserves. But on the campaign trail, Mr Trump promised to brand China "a currency manipulator" on his first day in office. This he failed to do, though he's had plenty of digs at China on the subject.

It's unlikely that the President has been overcome by a bout of discretion, but perhaps someone has persuaded him to hang fire for moment. The fact is that by the US Treasury's own guidelines, China does not qualify as a currency manipulator. There are three criteria that need to be ticked before any nation gets branded with that tag :

1. It must have a trade surplus with the US of more than $20 billion  --  with a US trade surplus of $350 billion, China fills that condition and then some.

2. It must have a current account surplus of more than 3% of GDP  --  China fell below that level in June 2016 and remains there

3. It must be engaged in persistent one-way currency intervention (to lower the value of its currency)  --  China's intervention has all been in support of the yuan / renminbi.

1 / 3 , then.

The US Treasury's next report on this is due in April. Even though in theory China is in the clear, it will be awaited eagerly. If China is labelled a manipulator, the next steps are negotiations, an appeal to international authorities and then potentially punitive action so the stakes are indeed high. Of course, judging by the rhetoric t's possible Mr Trump won't wait that long or play strictly to the rules.

And so finally to Japan, and the golfing analogy in the title of the piece refers to the round Japanese PM Abe and Donald Trump will play this weekend when they meet for discussions in Florida. We hope for Mr Abe's sake that he is not one who needs to concentrate 100% on his game without distractions, or he could run up a big score. Mr Trump said the other day that the Tokyo authorities "play the money market, they play the devaluation market and we sit there like a bunch of dummies". Which, as pre-tee off "bon mots" go, is not really the same as "Good luck partner, play well ....."

Mr Trump might, just might, demand that any grand US-Japan deal is conditional on Japan refraining from currency intervention and not allowing the Bank of Japan to take measures to control Japanese Government Bond yields. Japan has been an enthusiastic intervener (is that a word?) when required and control of bond yields is part of the BoJ's current policy.

To agree to a non-intervention clause could have unpleasant ramifications on the upside for the yen, and giving up control of BoJ policy at Mr Trump's behest would presumably be disastrously unpopular at home. On the other hand, who knows what sort of protectionist measures (or worse) Mr Trump might consider if he feels rejected. Perhaps Mr Abe's best hope is for the backroom boys to sort things out over a period of time whilst both leaders are all smiles at the meeting. Might be tricky, though .....

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