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Recently, the Chief strategist of the French National Front, David Racheline, indicated that, after the country’s withdrawal from the Euro, the service of the national debt would be discharged in the new national currency as far as bonds issued under French law (+/- €2.000 billion) were concerned, while the remainder (+/- €200 billion) in the currency specified in the indenture. This declaration is evidence of a highly debatable interpretation by the FN of the concept of “national sovereignty”!

In response to this statement, Moody’s (a Rating Agency) indicated that any unilateral change in the currency of denomination would constitute a flagrant violation of the issue’s terms and conditions. France would be declared in default which would immediately accelerate the repayment of all its outstanding debt; in the event it would be the largest default ever in history! Mrs. Le Pen’s supreme contempt for Rating Agencies notwithstanding, the negative reaction of financial markets leaves no room for doubts.

These unambiguous positions call, nevertheless, for number of clarifications:

From a legal standpoint, it is quite justified to distinguish between bond issues governed by the laws of different jurisdictions. However, the distinction concerns essentially the “competence” of the Courts and “applicable” law in case of conflict. Under no circumstances does it cover other characteristics of a contract, and particularly the currency in which it must be executed.

If there is not the slightest doubt as to France’s “sovereign” right to replace the € by a new “national” currency, such a decision must by necessity lead to one of the two following consequences:

– Either, both the old and new expressions of the currency retain a relationship of equivalency over time which, as was the case during the introduction of the € in replacement of the Franc, ensured the seamless “continuity of contracts” avoiding any modification in the economic rights of the parties;

– Either, if these rights are altered and one of the parties suffers a prejudice (in this case the devaluation of the new national currency relative to the currency of the contract), then the other party must compensate the injured party. This is what happens in the event of the nationalization of private property where the State compensates those who are obliged to surrender their ownership title; otherwise it would be tantamount to “confiscation” which the victim could challenge in court. Unilateral redenomination of a bond issue would lead to a comparable situation.

If the FN challenges the foregoing analysis, it would be urgent to seek clarification from the competent judicial Authorities, to avoid leading the elector (and investors) into error.

In the event (in my opinion highly unlikely) that the FN’s position was validated and even in anticipation of such a verdict, market makers in French OAT’s would be well advised to set up immediately a dual market for French debt securities according to the law under which each is issued. Failing to do so, they will be exposed demands for compensation by investors who will argue that they were “miss-sold”.

Financial market Supervisors, in particular those responsible for trading in OAT’s, should immediately consider this problem in order to properly discharge their fiduciary obligation of investor protection.

It would also be most interesting to know the opinion of the ECB on the subject, considering that it owns some €250 billion of OATs and is increasing its position through its ongoing quantitative easing program: a French default would significantly impact its balance sheet and risks weakening the Eurozone as a whole.

If one is to accept the analysis proposed by David Racheline here above, the risks associated with a FN electoral victory would include:

– Complicating immeasurably the functioning of the OAT secondary market, creating confusion between its compartments;

– Reducing the liquidity in each of the compartments which would translate into lower prices;

– Making explicit for public opinion, through the posted “spreads” between compartments, the market perception of a possible/probable FN victory;

– Affecting France’s access to financial markets:
o a) International: to attract investors, any new issue would necessarily be governed by the laws of an acceptable non-French jurisdiction.
o b) National: The fear of unilateral redenomination will lead to higher interest rates, making the servicing of French debt significantly more expensive.

– Creating an environment conducive to capital flight.

Furthermore, it is far from evident that under such circumstances, the regular refinancing operations could proceed unimpaired. To this risk would be added the likely massive withdrawal of amounts accumulated in “savings accounts” (Livret A), both reflecting the anticipation of devaluation and a commensurate loss of “purchasing power” by the public at large. Thus the conditions for the eruption of a financial crisis, well before the FN could implement its program, would be in place. It would lead to the immediate instauration of exchange controls ant the limitation of bank withdrawals.

Exiting the Single currency is undoubtedly a coherent and respectable political option; it demands however, in exchange, complete transparency concerning the consequences that such a fully assumed choice entails. It is, however, totally unacceptable that the Front National continues to advocate the merits of withdrawing from the € by presenting the population with completely baseless “alternative truths”!

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