00:12:13 · Olivier Blanchard, Erika Beras, Jeff Guo, Thomas Philippon
[00:12:13] S5: la debt. [00:12:14] S1: La debt. Anyway, Olivier was basically pointing out that if a country is growing fast enough, it doesn't have to pay off its debt. It can essentially outgrow its debt. We actually did a whole episode on this idea. [00:12:27] S2: The key thing here is the interest rate on your debt. That's the rate at which your debt is growing and compounding. You just need your economy to grow faster than that. That's why Olivier is always telling people there is no magic number for too much debt. [00:12:42] S5: You can live with debt at 200%. It may not be great. [00:12:45] S6: Mhmm. [00:12:46] S5: But you can do it as long as you can stabilize it. You know, you wish you didn't have it? Yes. No problem. But it's not the end of the world. [00:12:54] S1: Back when Olivier was giving his speech in 2019, it seemed to him and many people that interest rates would continue to be low for the foreseeable future so countries could keep on borrowing for the foreseeable future. [00:13:08] S5: So that turned out to be a mistake. I had not anticipated COVID. I had not anticipated Ukraine. I had not anticipated Iran. I had not anticipated AI. I do apologize for all that. As a result to [00:13:23] S2: tell the future? Uh-huh. [00:13:24] S5: Yeah. Exactly. The future is really hard to You you know?
00:13:24 · Olivier Blanchard, Jeff Guo, Erika Beras, Thomas Philippon
[00:13:24] S5: Yeah. Exactly. The future is really hard to You you know? [00:13:28] S2: Yeah. In recent years, that weird zero interest rate world we were all living in, we have snapped out of it. Inflation is back. There have been crises and wars, so interest rates are on the rise all around the world, meaning that it's getting more and more expensive for everyone to borrow money, including governments. [00:13:47] S1: So starting the past couple years, many economists have been wondering, is it time for this international borrowing spree that countries have been on to finally come to an end. Everyone has been waiting to see which country is showing signs of trouble. [00:14:03] S2: Or like our other economist, Thomas Philippon, put it, who will be the first penguin to get eaten by an orca? [00:14:08] S6: You know, who's gonna be the first to jump in the water? [00:14:11] S2: In 2024, Thomas and a couple of other economists on that fancy French council published a big report with a big warning to the French government. [00:14:20] S6: I saw the situation as going as going in the wrong direction, and I thought that we could try to convince people that the time to act was now. [00:14:29] S1: Basically, they said, we're not in a crisis right now. Up until this point, France has been growing fast enough to keep all this debt under control. But if we keep piling on more and more debt, pretty soon, we could be in trouble.
00:14:29 · Erika Beras, Jeff Guo, Thomas Philippon
[00:14:29] S1: Basically, they said, we're not in a crisis right now. Up until this point, France has been growing fast enough to keep all this debt under control. But if we keep piling on more and more debt, pretty soon, we could be in trouble. [00:14:43] S2: And look, Thomas is not one of those fiscal conservative types who thinks that governments must borrow less and spend less. Used to work as a top adviser to members of the center left French Socialist Party. [00:14:55] S6: I thought if somebody like me says, well, maybe it is time to actually, you know, do something, perhaps he would add a tiny bit more credibility. [00:15:04] S1: In this report, The Economist offered what Thomas thought was a fairly mild proposal. They weren't saying that France needed to reduce its debt. They just wanted the government to stop adding to the debt. In other words, to start balancing the budget finally, and not even right away, gradually over the next seven years. [00:15:24] S6: The point was, look, we have time. If we act now, we don't have to do something crazy, but we need to start now. And I hope that, you know, people would understand that indeed that was the right thing to do. [00:15:37] S2: But instead, Thomas says he may have misunderestimated the nature of modern French politics, because the French government did not follow his advice. [00:15:48] S6: Of course. No. They didn't do anything. But, you know, I tried anyway.
00:15:48 · Thomas Philippon, Erika Beras, Jeff Guo, S7
[00:15:48] S6: Of course. No. They didn't do anything. But, you know, I tried anyway. [00:15:53] S1: Yeah. Since Thomas and his colleagues published that report in 2024, France's debt problem has continued to get worse. And then a couple months ago, there was a pretty ominous warning sign. The interest rate on ten year French bonds suddenly spiked. [00:16:10] S2: Investors were demanding that the French government pay an extra premium on its interest rates, like above and beyond what most other countries in the EU pay to borrow money. The interest rate went from three ish percent to almost 5%. It's the highest that France has had to pay since the two thousands. [00:16:27] S1: And that's because investors think that of all the countries in Europe that share the euro as their currency, France is becoming especially risky. They're worried they're not gonna get their money back. When [00:16:41] S2: we come back from the break, why is France getting singled out right now? And what can other countries learn from this situation? You know, asking for a friend. Because if you think France's debt situation looks bad, oof, look at The US. [00:16:55] S1: Look in the mirror. [00:17:00] S7: Stay tuned for the following announcements and messages from our sponsors. This message comes from Capital One. Capital One offers checking accounts with no fees or minimums. What's in your wallet? Terms apply. See capital1.com/bankguy for details. Capital One NA, member FDIC.
00:17:00 · S7, S0, Jeff Guo
[00:17:00] S7: Stay tuned for the following announcements and messages from our sponsors. This message comes from Capital One. Capital One offers checking accounts with no fees or minimums. What's in your wallet? Terms apply. See capital1.com/bankguy for details. Capital One NA, member FDIC. [00:17:19] S0: This message comes from Babson College. The world needs entrepreneurial leaders, and you can become one at Babson College. Gain the skills to lead, motivate, and inspire through a specialized master's or MBA program with full time, part time, and online options. Turn ideas into action with a graduate program that caters to your professional needs and fits your lifestyle. Ranked number one in entrepreneurship by US News and World Report. Visit babson.edu/gradprograms. [00:17:49] S7: This message comes from LinkedIn. As a small business owner, you wear many hats. You're the owner, the marketer, the seller, the hirer. With LinkedIn, you have the tools to help you boost your visibility, find prospective customers, and find the best team for your small business all in one place. So while LinkedIn can't hang up all of your hats, it makes it easier to wear them all. Learn more at linkedin.com/planetmoneyshow. [00:18:16] S2: There is a stereotype in finance, a somewhat unfair but not entirely wrong stereotype about European countries, which is that there are basically two kinds. Some European countries are seen as economically responsible. They always pay back their debts. No fuss. No drama. These are countries like Germany, The Netherlands, Austria, and France.
00:18:16 · Jeff Guo, Erika Beras
[00:18:16] S2: There is a stereotype in finance, a somewhat unfair but not entirely wrong stereotype about European countries, which is that there are basically two kinds. Some European countries are seen as economically responsible. They always pay back their debts. No fuss. No drama. These are countries like Germany, The Netherlands, Austria, and France. [00:18:40] S1: Then there are the countries that have historically been seen as economically irresponsible. The ones where there always seem to be some kind of tomfoolery going on with the government or the banks or the markets. These are countries like Portugal, Italy, Ireland, Greece, Spain. [00:18:57] S2: There was actually this pretty derogatory acronym for these countries, p I I g s, pigs. Investors used to see these countries as riskier. They were willing to lend money to these countries, but only at a premium. [00:19:09] S1: But right now, investors think France is a riskier bet than all of those countries. They are charging France a higher interest rate than Italy, than Greece even. Greece, the country that went through that horrible, embarrassing, painful bailout during the financial crisis. [00:19:25] S2: Greece's debt to GDP ratio is a 136 right now. France is only around a 120%. So on paper, France's debt, not as bad as Greece's. So why does the market now think that France is a riskier bet than Greece?