GLOBAL DEBT CRISIS STARTS WITH FRANCE / MACLEOD FINANCE

Global debt crisis starts with France

All G7 nations are in deep debt trouble. It’s just a case of which one brings down the others. It now looks like France is failing first.

ALASDAIR MACLEOD

We can be sure that the euro debasement trade versus the US dollar is not over. 

France’s situation is suddenly critical, particularly when its experience of the 1973—1974 OPEC crisis is considered.

Introduction

Regular readers of MacleodFinance will be aware of a looming debt crisis affecting all G7 member nations and beyond. 

This crisis is unique for modern times, being a widespread government financial crisis and not a private sector one in its origin. 

The outstanding question has been which of the G7 dominoes will topple first, and will it knock all the others down?

We appear to have the answer: France. 

Headlines tell us of a far-right takeover in the French senate, and there’s a presidential election in six months. 

Students are rioting out of control. 

But this is not unusual for France; the problem the media misses is the government debt bomb in the process of exploding.

The chart below reflects the growing risk of a French default on its debt, whereby the buyer in effect pays an insurance premium as protection against default on a 5-year bond. 

In the last month, this CDS has risen from 33.75, an increase of 136%. 

It is screaming crisis.

France’s debt situation

The French government’s debt stood at €3.596 trillion in June, giving a debt to GDP of 119% with the economy hardly growing. 

Along with other G7 nations (US, UK, Germany, Italy, Canada, and Japan) France’s economy is being undermined by the oil crisis in the Middle East. 

Consequently, bond yields have been rising rapidly, undermining the ability of the government to finance its budget deficit:

In mid-December 2022, the 10-year bond yielded minus 0.2%, and France’s debt to GDP stood at €2.95 trillion, equal to 111.6% of GDP. 

Since then, nominal GDP has grown by €383 billion while debt has grown by €646 billion. 

In other words, debt has been growing 69% faster than GDP, which is taken as the proxy for financing it. 

And now, debtors see the French economy tanking along with the other G7 nations due to the oil shock, which has two consequences.

Firstly, tax revenues will decline while welfare costs rise increasing the budget deficit which was already deteriorating from 4.7% of GDP to 5.4% estimated for this year by the government itself, before the consequences of the oil shock are factored in. 

And secondly, as the divisor in the debt to GDP equation, if the economy actually contracts that of itself will drive the ratio higher.

It is becoming obvious to the markets that France is in an inescapable debt trap. 

A debt trap is one whereby debt service costs outrun the capacity to refinance it on sustainable terms, describing the French situation to a tee. 

Furthermore, because France doesn’t have its own currency, it cannot print its way out of trouble, an escape route often propounded as a solution.

If France was able to print its way out, it would collapse her currency, a solution not available to euro-area nations. 

But it is assumed that despite restrictions on the European Central Bank to do so, ways will be found to make the credit available for the French government without escalating its borrowing costs as a debt crisis demands. 

Consequently, much of the dollar’s trade-weighted strength is due to the euro exchange rate falling, which is the main US$ TWI constituent:

In just six weeks, the euro has fallen 3.7% against the US dollar, taking over the position on the G7 currency’s naughty step from the Japanese yen.

We can be sure that the euro debasement trade versus the US dollar is not over. 

France’s situation is set to deteriorate further, particularly when its experience of the 1973—1974 OPEC crisis is considered. 

It will lead to uncomfortable questions over the other euro-area participants, dragging in all national euro debtors — remember the PIGS? 

They still lurk in the background.

The table below considers the key metrics with respect to the debt positions of all G7 nations today ranked by today’s debt ratios in descending order:

What’s true of France is demonstrably true of the others. 

With the possible exception of Germany, they are all constrained by unsustainable debt past the point of no return and simply cannot afford the higher financing costs likely to be triggered by the still developing crisis in the Middle East. 

In their individual ways, they all have other problems which will emerge as the current G7 debt crisis evolves. 

And this begs the question: how will they tackle the inflationary outcomes if they face anything like the mid-seventies’ experience?

Politics, not economics or old-fashioned common sense always drives these outcomes. 

This is why currencies are falling priced in gold at an accelerating rate. 

Physical gold is real legal money, the safe haven from the conditions which are set to collapse both the fiat dollar and the other G7 fiat currencies, all of which are simply credit with escalating risk attached.

Just as the dollar and other G7 currencies plunged lower against gold in 1973—1974 during the OPEC oil crisis, they are set to do so again today. 

With France setting the pace for the euro, we can see how the fiat currency system is now going to end. 

And as it gathers momentum, it won’t take long.

Clearly, for these unfolding events gold is undervalued priced in fiat currencies. 

The recent consolidation is a heaven-sent opportunity to escape the coming mayhem as fiat currencies race each other towards extinction.