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Global ratings agencies spooked by possible Le Pen victory

Leaving the euro zone, is one of the promises on which Marine Le Pen has based her party the Front National's economic strategy.

Published: February 11, 2017, 9:11 am

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    The FN believes the rules governing the country’s central bank should be changed to allow it to directly finance the French state, but the proposal has spooked globalist bankers, some market analysts and ratings agencies.

    They say Le Pen’s victory could trigger 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”, after the FN told to the Financial Times that €1.7 trillion of French public debt would be redenominated into francs if the party gets into power.

    The FT reported, “in comments that are likely to amplify fears about the impact of a FN victory on the global financial system”, David Rachline, the FN’s head of strategy, said in an interview that only about 20 percent 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”.

    The newspaper quoted the alarm of both ratings agencies.

    “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.”

    Lawyers contacted by the FT said in the case of France leaving the euro, French bonds 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,” the FT concluded.

    The FT alluded to the Greek financial disaster. 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 to withdraw funds simultaneously in case they wanted to leave the euro.

    But a devalutaion of the country’s currency would make French industry more competitive, the FN believes. Since France does not share the American privilege of having the world’s reserve currency and number one military power, France would hardly be able to coerce its trading partners into better deals.

    Therefore, it is hoped that by lowering the value of the new national currency, French exports will be boosted.

    The second thrust of the party’s economic policy is called “intelligent protectionism” in defence of French industries — something that EU rules and dictates currently prohibit, says the FN.

    One senior official alluded to revisiting Charles de Gaulle’s vision for the French economy. “We are not extreme, we are Gaullists,” the official, who did not want to be named, told the Financial Times.

    This policy, known as “dirigisme” in France, would impose trade barriers on “unfair competition” from abroad, according to party officials. A subsequent 3 percent import tax on foreign goods could later guarantee tax breaks for the poorest.

    Mikael Sala, the head of Croissance Bleu Marine, a think-tank supporting the FN, is not worried that a redenomination of the currency would be considered a default by Anglo-American 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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