Le Pen victory would push French debt to 120% of GDP, warns Goldman Sachs
France’s national debt could surge higher if Marine Le Pen’s National Rally (RN) party wins an absolute majority in the national assembly elections, Goldman Sachs has warned.
Goldman predicts that, if in power, the far-right would deliver a sizeable fiscal expansion, sending France’s debt-to-GDP ratio up to 120% by 2027.
That highlights why France has turned into the most unloved European equity market (see earlier post).
In contrast, under” “a status quo electoral outcome”, debt would stabilise at 113% of GDP in 2027, Goldman estimates.
And if France is left with a hung parliament that does not allow any political group to pass meaningful tax or spending measures, debt could rise to 116% of GDP.
Goldman points out that political groups have started to outline their economic policy platforms:
On labour market reforms, both the left coalition and the far-right oppose the 2023 pension reform, which raised the retirement age. More recently, however, far-right leader Jordan Bardella stated that revisiting the pension system would not be a “near-term priority” and rather would come at a “later stage.”
On taxes, both the left coalition and the far-right support cutting VAT on energy and food, as well as re-introducing a wealth tax. At the same time, the current government and the centre-right have pledged not to increase taxes on corporates and households.
France has made some progress in lowering its public debt in recent years; in 2023 it was 110.6% of GDP, according to statistics body INSEE, down from 114.9% in 2020.
Goldman also warns that the current “ongoing episode of political uncertainty” could hurt the French fiscal outlook, if it leads to higher borrowing costs for Paris.
Key events
Closing summary
Time to recap…
France’s stock market has become the least favourite in Europe, according to a poll of fund managers by Bank of America.
Goldman Sachs has warned that a victory for Marine Le Pen’s party in France’s elections would trigger a surge in the national debt.
HSBC’s Swiss private bank failed to conduct proper checks on $300m worth of funds sent between Lebanon and Switzerland during a period of 13 years, Switzerland’s banking regulator has said.
The board of Hargreaves Lansdown is willing to back a takeover offer from a private equity consortium that would value the UK’s largest investment site at £5.4bn.
US retail sales barely rose in May, suggesting that economic activity remained lackluster.
HSBC has said the money laundering breaches raised by Swiss regulator FINMA today (see here) were “historic”.
The bank added:
“HSBC takes its anti-money laundering obligations very seriously including complying with all laws and regulations in every market we operate in.”
HSBC is planning to appeal the decision and so would not be commenting further.
Hargreaves Lansdown receives £5.4bn takeover proposal
Investment platform Hargreaves Lansdown has received a new takeover proposal from a group of private equity buyers, worth £5.4bn.
This revised proposal follows three previous approaches in recent months from a consortium of CVC Advisers Limited, Nordic Capital and Platinum Ivy of Abu Dhabi.
They are now proposing to pay 1,140p per Hargreaves Lansdown share in cash, up from the 985p/share offer which was rejected in April.
Hargreaves Lansdown board says it is willing to recommend this new proposal unanimously to shareholders, if a firm offer is made, and will provide the consortium with access to carry out due diligence work.
Shares in Hargreaves Lansdown have jumped 5%, to £11.27.
Goldman Sachs’ warning that a far-right government could drive up France’s national debt (see here) comes at a politically sensitive time.
Tomorrow, the European Commission is expected to name and shame EU members who have failed to keep to its budget rules, to aim for annual deficits of 3% and debt at 60% of GDP.
France (which ran a deficit of 5.5% of GDP last year, and a debt of 110.6%) could easily fall foul of the excessive deficit procedure, which could potentially lead to a fine.
France has long got away with breaching the eurozone’s budget rules, granted a laxity that southern European members could only dream of.
But with Marine Le Pen’s party riding high in the polls, the European establishment may take a tougher line.
After all, it’s one thing to let off a pro-EU, statesmanlike leader for the type of reckless spending that endangers the economic stability of the eurozone. It’s quite another if it’s carried out brazenly by a nationalist firebrand who doesn’t think the rules are worth the paper they’re written on in the first place.
“If an irresponsible [French spending] plan was put on the table, and the Commission said ‘no problem,’ then the whole fiscal framework is lost,” said Zsolt Darvas, a senior fellow at Brussels’ influential think tank Bruegel, referring to the way the EU’s executive arm gets to run the rule over governments’ budgets. “Other populist parties would forever disregard the rules.”
Wall Street isn’t spooked by the weaker-than-expected US retail sales figures.
Stock futures have moved a little higher, while the yield (or interest rate) on US government debt has fallen (showing that prices have risen).
Poor economic news could be good for the markets, if it prompts the US Federal Reserve to cut interest rates soon….
US retail sales barely grew in May
Just in: US retail sales rose more slowly than forecast last month.
Retail and food services sales across the US rose by 0.1% in May, following a downwardly revised 0.2% fall in April.
On an annual basis, retail sales were 2.3% higher than in May 2023, a slowdown on the 2.7% rise recorded in April.
slowing eco
⭐ Retail Sales Ex Gas/Autos MoM, Actual: 0.1% 🔺, Previous: -0.3%
⭐ Retail Sales YoY, Actual: 2.3% 🔻, Previous: 3%
⭐⭐ Retail Sales Ex Autos MoM, Actual: -0.1% ❌⚖️, Forecast: 0.2%, Previous: -0.1%
⭐⭐⭐ Retail Sales MoM, Actual: 0.1% ❌🔺, Forecast: 0.2%,… https://t.co/CtU3gtwXEZ
— god of trade (@candkjr) June 18, 2024
This may indicate that demand across the US weakened last month, with consumers weighed down by high interest rates.
Michael Brown, analyst at Pepperstone, says the report is a further sign that the ‘US exceptionalism’ narrative has likely run its course.
“The May US retail sales report points to further signs of fatigue for the US consumer, with headline sales rising by a meagre 0.1% MoM, up from a downwardly revised 0.2% decline in the prior month.”
Le Pen victory would push French debt to 120% of GDP, warns Goldman Sachs
France’s national debt could surge higher if Marine Le Pen’s National Rally (RN) party wins an absolute majority in the national assembly elections, Goldman Sachs has warned.
Goldman predicts that, if in power, the far-right would deliver a sizeable fiscal expansion, sending France’s debt-to-GDP ratio up to 120% by 2027.
That highlights why France has turned into the most unloved European equity market (see earlier post).
In contrast, under” “a status quo electoral outcome”, debt would stabilise at 113% of GDP in 2027, Goldman estimates.
And if France is left with a hung parliament that does not allow any political group to pass meaningful tax or spending measures, debt could rise to 116% of GDP.
Goldman points out that political groups have started to outline their economic policy platforms:
On labour market reforms, both the left coalition and the far-right oppose the 2023 pension reform, which raised the retirement age. More recently, however, far-right leader Jordan Bardella stated that revisiting the pension system would not be a “near-term priority” and rather would come at a “later stage.”
On taxes, both the left coalition and the far-right support cutting VAT on energy and food, as well as re-introducing a wealth tax. At the same time, the current government and the centre-right have pledged not to increase taxes on corporates and households.
France has made some progress in lowering its public debt in recent years; in 2023 it was 110.6% of GDP, according to statistics body INSEE, down from 114.9% in 2020.
Goldman also warns that the current “ongoing episode of political uncertainty” could hurt the French fiscal outlook, if it leads to higher borrowing costs for Paris.
French supermarket giant Carrefour is not sharing in today’s stock market recovery.
Shares in Carrefour have tumbled by over 7%, following reports that France’s finance ministry has asked a court to fine the retailer over contracts with franchisee stores that it says were unbalanced in its favour.
FRENCH FINANCE MINISTRY CONFIRMS IT HAS ASKED A COURT TO FINE CARREFOUR AFTER FINDING ABUSIVE TREATMENT OF FRANCHISES
— Capital Hungry (@Capital_Hungry) June 18, 2024
Carrefour contested the ministry’s “grievances”, saying it was intervening in a dispute that began several months ago without providing new information on the merits, and that it had “full confidence” in its ability to demonstrate the validity of its contracts, Reuters reports.
Despite falling in investors’ affections, the French stock market is a little sttonger today.
The CAC 40 index is 0.33% higher today, gaining 25 points to 7,596 points.
Germany’s DAX has gained 0.15% while the Italian FTSE MIB has gained 1%.
Lee Hardman, senior FX strategist at MUFG, says:
“Markets have been settling down after last week’s moves in French government bonds and we have had some comments from [Marine] Le Pen saying she was respectful of institutions.
French Markets Stabilize After Le Pen Says She’ll Work With Macron In Appeal To French Moderates
“I’m respectful of institutions, and I’m not calling for institutional chaos. There will simply be cohabitation.”https://t.co/6c1TjoEKiz
— Jean-Claude (@Beyond_Mystic) June 17, 2024
Retail insolvencies jumped in April
Today’s UK insolvency statistics also show there was surge in retail failures this spring.
Wholesale and retail trade insolvencies increased by 27% month-on-month in April to 355, up from 280 in March, and were 30% higher than in April 2023.
We learned a month ago that overall insolvencies rose by 17% in April, but today we have more details (as well as the top-line data for May).
Gordon Thomson, restructuring partner at leading audit, tax and consulting firm RSM UK, says:
“The tough trading environment for the retail sector continues to drag on, resulting in an increase in insolvencies in April. As retailers grapple with high costs, lacklustre consumer demand and too many April showers, they were also hit with an increase in national minimum wage which may have been the final straw for some.
“However, with inflation easing, real wages growing, and interest rates set to come down, this bodes well for consumer confidence and sets the stage for an increase in consumer spending in the second half of the year. For those retailers that have managed to weather the storm thus far, there’s light at the end of the tunnel.
