The spread between French and German 10-year government bonds – widely seen as the best indicator for stress in the eurosystem – has narrowed yesterday despite adverse comments from David Rachine, head of strategy of presidential contender Marine Le Pen.
Ra-chine explained to the Financial Times that he would convert some 80% of outstanding debt, in particular bonds governed by French law, into the new national currency when winning the election and leaving the eurosystem.
All three conditions are unlikely to be achieved easily. First, Marine Le Pen is widely seen as losing the election. Second, leaving the EU and the eurozone requires a change to the French constitution which cannot be implemented by the president on its own.
Third, redenomination of outstanding debt is a juridical challenge. We have seen in the case of Greek privately held government debt restructuring or in case of Banco Espirito Santo’s restructuring of subordinated debt that governments have influence over debt governed by local law – in both cases, debt governed by international law was not impaired.
Yet converting its debt into national currency when the euro still exists would be treated as default by the leading rating agencies. As Marine Le Pen argues for an “intelligent protectionism” and a devaluation of the new currency, the re-denomination threat also comes up as an announcement for international investors to lose money.
The news flow from Marine Le Pen’s camp remains worrisome for international investors. We still expect Le Pen to lose the election, but are aware that the French government bond market could remain volatile in the months ahead.
Markus Allenspach is head of Fixed Income Research at Julius Baer