France accelerates towards the abyss

The first step of the leftish madness in France has started. The Government decided to roll back part of the increase in retirement age, that was passed 2 years ago by the former President Nicolas Sarkozy. And it decided to do it by a very strange procedure - not by passing a law amendment, but by a Government "decree". These types of acts are very suspicious from judicial point of view. But at the moment the new government can not pass a new law, as in old parliament the Sarkozy's party has a majority, and a new election is scheduled for June 10th. So it would be better to wait until election and propose the new law in Parliament. But the Government is hurrying - may be in an effort to influence the election itself by such a populist moves.

Generally it is expected Hollande to win this vote and to acquire a majority in legislative assembly. This is due to the divide in right, where the extreme right party of Marine Le Pen is taking voters from the classic right of Sarkozy. This way Le Penn is de facto in one team with the populist left as in majoritarian voting system with this divide the left will take more deputies. So the parliamentary vote is decided although always a chance for surprise exists.

For politics such moves are useful, but for markets they are very risky. France risks further lowering of its official credit rating from the so called leading credit rating agencies. Now it is AA, but can fall further, as one of the arguments of agencies in past that was in favor of France was exactly the Sarkozy's pension reform. It was very palliative and limited, but agencies said it is a move in right direction and this was enough to keep the France rating high. In fact the real rating calculated with Dobri's formula is much lower (BB). But if such adventurous political moves from Hollande continue, may be soon even old agencies will calculate closer to that level.

The markets are very nervous at the moment. France is risky with its high debt and deficit, added to a deep rejection of making reforms that was demonstrated on presidential vote that crushed Sarkozy. It becomes a market poker if you decide to invest in France led by Hollande, who promised a 75% tax level for "rich" and (some already fulfilled) promises to cancel even the weak austerity measures of Sarkozy.

But it is not the official credit rating the main problem. The real problem is money. France lacks of money and such populist moves that require more money are to accelerate it to abyss. For a government that depends on financial markets it is a suicide to experiment with crushing confidence policies. The bankrupt can come suddenly - just in days time. The confidence is easily lost and hardly rebuilt. And the extreme power with having both executive and legislative institutions is not enough to keep the country safe, if you are with no money.

Much rich Frenchmen are already leaving the country until the Hollande experiment passes. France is losing money, taxpayers and talented entrepreneurs. It will soon have great problems with debt. And then the Spain and Italy problems will look like an innocent child's game...

June 6th 2012

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