French Finance Minister Abbe Terray, who served in the profligate Louis XV regime until 1774, once remarked that governments should default at least once a century “to restore equilibrium”.
And it has been more than 200 years since France, once the gold medallist defaulter of Europe, refused to pay creditors.
The Fifth Republic, which has accumulated debts worth almost €3.6 trillion ($5.8 trillion), or 120 per cent of GDP, is facing interest repayments of well over €100bn next year, as yields on its debts soar toward 5 per cent, up from near zero at the start of 2022.
France’s borrowing costs easily exceed those of the so-called PIGS southern European nations of Portugal, Italy, Spain and even Greece, once the poster child for fiscal incompetence.
With anaemic growth amid mass rioting, spending that absorbs more than 55 per cent of the country’s GDP, budget deficits of 5 per cent of GDP pencilled in for coming years (well over double Canberra’s), and a presidential election due in April, it’s hard to see things getting better before they get worse.
The next global financial crisis is clearly on the horizon. The financial collapse of 2008 came largely as a surprise, but the cause of the next – and likely far worse – conflagration should be obvious to all: governments’ excessive debts, and the ridiculously self-serving financial regulations that have sustained them.
Reckless fiscal policy implemented by many of the world’s richest and most powerful nations is almost certain to trigger a crisis in financial markets, with devastating impacts on ordinary people.
As happened in late 2007, panic will spread, pushing up interest rates in bloated public debt markets, prompting massively overextended governments to put up taxes and slash spending in ways that will only inflame already furious voters.
There’s competition, though, to be the trigger.
In Japan, with debts at more than 200 per cent of GDP, the 30-year bond yield has more than doubled to above 4.2 per cent, the highest in its history.
America’s debt burst through the $US40 trillion ($57.5 trillion) for the first time in August, even before President Donald Trump promised to rack up another $US1.3 trillion on the national credit card to give $US5000 to every American adult citizen, should his party do well in the midterm elections next month.
US 10-year bond yields have jumped from 4 per cent in February to 5.3 per cent, the highest since 2002, when US government debts were the equivalent of less than 60 per cent of GDP – around half their current level.
Amid all the globalist claptrap, it’s still a dog-eat-dog world: Washington suddenly sold billions of euros and bought Japanese yen in July, fearful the panicking Japanese would start selling off their massive US bond holdings to shore up the yen’s value. So much for NATO economic solidarity!
Bond holders, being pension funds, financial institutions and private investors, are understandably baulking at the prospect of systematically higher inflation, and are even beginning to question the creditworthiness of prominent G20 governments.
They’ve been fooled once by the unusually low inflation of the pre-Covid era, enduring huge real losses as governments sprayed money everywhere, triggering investable inflation. They won’t be so readily tricked again. Now they know that governments can and will use their central banks to prop them up in crises. Quantitative easing on steroids, including in Australia, is now standard operating procedure. So-called independent central banks know who their masters really are.
That’s why the money-creation pump won’t be so useful this time. Investors have learned.
True to his word, Terray defaulted on France’s debts in 1770, slashing interest rates and stretching loan terms without permission from creditors.
But a relatively smaller France can’t treat creditors as French kings once could. Its predicament is worse than America’s or Japan’s. Most fundamentally, it cannot independently and arbitrarily create the currency in which it borrows, given it has shackled itself to the eurozone.
A public debt crisis will be worse than the banking crisis of 2008. Then, governments could rescue the banks, but who will rescue the governments?
Governments are naturally a fiction by which everyone tries to live at everyone else’s expense. Government bonds are the bedrock of the global financial system. Taxes are already far higher than they should be. Expect the costs of adjustment to fall ultimately on the least politically well-connected.
Indeed, France’s fiscal woes, amid rising populism, could wreck the whole eurozone. Marine Le Pen, the likely winner of next year’s presidential race, has long disliked the European Union, a project France encouraged after World War II only to weaken and tie Germany down – something Berlin’s insane energy policies appear to have been doing all by themselves anyway.
Australia’s relatively modest fiscal problems won’t insulate it from a global public debt crisis. Victoria is already facing 10-year borrowing costs of more than 6 per cent, which will see an additional $3.1bn in annual interest costs from refinancing its $77bn of ultra-cheap, Covid-era debt alone.
Responsible Australian governments would start making cuts to spending now so they can better ride out the coming storm. Too bad we don’t have any.
President Javier Milei in Argentina has shown that even massive cuts in spending and regulation can supercharge economic growth, if the rest of the world remains stable.
But as the streets of France already illustrate, stability can’t be guaranteed.
