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?
00:19:25 · Jeff Guo, Erika Beras, Thomas Philippon
[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? [00:19:40] S1: That's because when it comes to government debt, numbers are not everything. There are also feelings involved, vibes. Thomas Philippon, the NYU professor who advises the French government told us, it's really about whether investors feel the country is moving in the right direction. [00:19:59] S6: The most important is the trajectory. That is, the markets would be extremely happy to finance France with 120 debt to GDP ratio if they were convinced that there was a credible program to slowly bring it down to 100, say. And so this forward looking part, this, you know, credibility of what you're gonna do in the future is way more important than where you start from. [00:20:26] S2: So in Greece, for instance, sure, the debt to GDP ratio is a 136%, but a few years ago, it was over 200%. Greece's debt has been on a downward trajectory. It is making progress paying off all that debt. And so for now, investors don't see Greece as being a huge borrowing risk. [00:20:45] S1: And for a long time, investors had good feelings about France. They were willing to ignore France's high debt because they were like, it's France. They will eventually get back on the right track.
00:20:45 · Erika Beras, Thomas Philippon, Jeff Guo
[00:20:45] S1: And for a long time, investors had good feelings about France. They were willing to ignore France's high debt because they were like, it's France. They will eventually get back on the right track. [00:20:55] S6: People assume reasonably that, well, eventually they're gonna do something. Okay? Well, this eventually is becoming like, really? Eventually? Eventually? Eventually? And some people have a doubt now. [00:21:06] S1: We are seeing in real time an example of a country that is slowly losing the benefit of the doubt. [00:21:15] S2: Couldn't the French government just put out a press release saying, don't worry, we're France. You don't think one of the largest economies in Europe is gonna not pay you back? [00:21:26] S6: Yeah. But France has been saying that for forever. So... And, you know, talk is cheap. By the way, the history of France is pretty terrible in that case because the French kings were sale of the soldiers. So... [00:21:36] S2: Oh, really? They didn't pay back their debts? [00:21:38] S6: Oh, no. And they were famous for for doing all kinds of mischief. [00:21:41] S2: Oh, that's bad karma. Thomas says if you just look at the financial situation in France right now, it's not that that bad. What the investors are really worried about has less to do with economics and more to do with politics. They are starting to think that maybe the French government is just incapable of doing what it takes of raising taxes or cutting spending.
00:21:41 · Jeff Guo, Erika Beras, Thomas Philippon
[00:21:41] S2: Oh, that's bad karma. Thomas says if you just look at the financial situation in France right now, it's not that that bad. What the investors are really worried about has less to do with economics and more to do with politics. They are starting to think that maybe the French government is just incapable of doing what it takes of raising taxes or cutting spending. [00:22:03] S1: The rise of the far left on one side and the far right on the other, neither of whom have realistic plans for balancing the budget, has made investors think twice about lending France money. [00:22:13] S2: And there is a key indicator here, this number that everyone looks at. It is the difference between the interest rate that France has to pay versus the interest rate that Germany has to pay, because everyone thinks Germans will always pay their debts. This is called the spread, and it's basically a fear index. It measures how much investors fear that France might not pay back its debts. [00:22:34] S1: And that fear index, shall we call it, it started to go up in 2024 just when president Emmanuel Macron, who was seen as his economically responsible, balanced budget type, started to lose control. Since then, the spread or this fear index has remained elevated. And then in late September, that's when the fear index spiked. It was as the protests were getting underway. [00:22:57] S6: The problem is the politics is completely messed up. And it was already pretty messed up before the recent protest. The recent protest has highlighted how messed up it is.
00:22:57 · Thomas Philippon, Jeff Guo, Olivier Blanchard, Erika Beras
[00:22:57] S6: The problem is the politics is completely messed up. And it was already pretty messed up before the recent protest. The recent protest has highlighted how messed up it is. [00:23:07] S2: And Thomas says it's not the protesters' fault. [00:23:11] S6: Many of the things that peep... The protesters are asking for are 100% legitimate. Like, you should have good condition to study. That's a real problem. [00:23:22] S2: But the more messed up France's politics looks, the higher interest rates they might have to pay, and that raises a scary possibility. A possibility that Olivier Blanchard has been studying in the years since he made that big speech about how sometimes having a lot of debt isn't so catastrophic. Catastrophic. Recently, he's been looking at when and how debt does become catastrophic. [00:23:43] S5: You have this... Is what I call the danger zone. Where it is exactly, we don't know. But I suspect that in the case of France, we are there. [00:23:53] S1: Olivier says once you're in this danger zone where investors have started to lose faith in your government, the situation could spiral out of control. [00:24:01] S2: Yeah. You see, these higher interest rates that worried investors are demanding, they are gonna make it even harder for France to pay off its debt. So France's financial trajectory starts to look worse. It's got this bigger hole to dig out of, and that gets investors even more worried. So they're gonna force France to pay even higher interest rates. [00:24:21] S1: It's like your classic bank run except on a national scale.