Why Wasn’t France Downgraded Sooner?
The immediate reason for France’s downgrading by Standard & Poor’s (from AAA to AA+) may have been hubris, as Tim Worstall suggested in Forbes magazine. Last autumn, President Nicolas Sarkozy embarked on an overall emergency plan to salvage both the collapsing economies of Southern Europe and the euro as a currency. It entailed — among other things — French guarantees to the European Financial Stability Facility (EFSF), a newly established fund that will take care of EU countries sovereign debts. A noble gesture, no doubt dictated, in Sarkozy’s case, by the need to appear, within months of a difficult reelection bid, as a great world-size statesman. But a deadly one. In practical terms, France burdened itself overnight with massive toxic loans — or the equivalent of toxic loans — that it was hitherto not answerable for, and that will probably never be recovered at full value. Its own sovereign debt ipso facto rose and reached a ceiling. And its credit shrank.
The deeper reason for France’s downgrading, however, is simply that France has been broke for years. And the real question is: Why has it taken so long for S & P and others to take good note of it ? After all, it is an open secret.
Back in the early 2000s, a whole school of influential French whistleblowers – known as the declinists – warned the nation and the decision-making elite around the world about the sore state of affairs. There was Nicolas Baverez, whose La France qui tombe (Falling France) was published in 2003. Or Jacques Marseille, whose Le Grand Gaspillage (The Great Waste) was published the same year, and who went on with several other books. Or Michel Godet, who pointed in Le Choc de 2006 (The Shock of 2006,) to the extravagant price the country paid for its comprehensive welfare state. Not to forget Claude Allègre, a noted academic and a former minister of education in a Socialist cabinet, or Louis Chauvel, a young professor at the Paris Institute of Political Studies (now a visiting professor at Columbia).
Drawing from their works and similar sources, I wrote in “Can France Be Saved ?”, an essay that was published in the May 2007 issue of Commentary:
The public debt grew from the present-day equivalent of 213 billion euros in 1978 to 454 billion in 1990. It then jumped to 740 billion in 1995, and grew again to 1.2 trillion by the end of last year. … But what is called public debt in France is less than half of what would be listed under that heading in countries like the United States or Canada. The category does not include the retirement funds for the civil service (between 800 billion and a trillion euros), the national-health-service deficit, or various private debts (like that of Crédit Lyonnais) taken over by the state. … Marseille warns that it may double over the next fifteen years. This is on the scale of the debt of the Ottoman empire in the late 19th century.
As I said, an open secret.
One of the reasons for Sarkozy’s election in 2007 was that he was expected to take France’s national debt seriously. One of the reasons for his subsequent fall of grace is that, here like on many other issues, he was not able to deliver. The debt, as measured by the conservative French criteria, grew at a 100 billion/year pace during his five years mandate and is now over 1.7 trillion, while the GDP almost froze. If things are allowed to go on like that, it would — hypothetically — reach a staggering 2.7 trillion in 2022, against a low growth GDP of 2.2 or 2.3 trillion. Marseille’s dark prophecy will then be fulfilled. Again, anybody with a brain was aware of that. Still, both the French political leadership and the world financial elite (including the notation firms) seemed to take the country’s triple A rating for granted. How so?
Policies are rooted in culture, history, idiosyncrasies. Historically, the French are a predominantly continental, military, Statist nation, whereas their Northern or transatlantic rivals (the Dutch, the Brits, the Americans) are predominantly oceanic, commercial, and free -enterprise oriented. As Statists, the French take the epithet sovereign more seriously than the noun debt. They may assess their debt, and nevertheless see it more a partnership of some sort than a liability. All they will insist for is the world market of finance to be disciplined, or regulated, to that effect. While the oceanic nations (and their late 20th century converts, the Germans) think that a debt is to be repaid in one way or the other, either by legal and contractual agreements or — beyond regulatory niceties — by the naked requirements of economic life.
However, even oceanic nations resort to credit laxity and public debt practices for extended periods of time. In fact, they do it even more easily than Statist nations, since they know that some reckoning will be exacted from them at some point; they let their Obamas borrow since their Tea Parties are watching. What happened in the case of France was that its own idiosyncratic habit of public spending and public borrowing coincided with a very lengthy period of oceanic indulgence in these matters. Even the Germans could not lecture their French friends for about twenty years, because of their own public overborrowing on behalf of the former Communist GDR.
The tragedy of Nicolas Sarkozy is that he did not grasp that it was just a coincidence. An America that has itself been degraded from AAA even before France is not going to grant much help any more. As for Germany, it managed to restore its economy in an impressive way, and thus to restore its credit. And Chancelor Angela Merkel, who will be facing elections in 2012 or 2013, will not be popular unless she jealously defends German interests only. Two excellent reasons not to support France too much.
Bill Whittle remarked in his video piece today that all we have to do to end up in ruin is to continue with the policies we all work with today. Seems about right to me. The Democrats are racing to the cliff and the Republicans are trudging to the cliff and both of them are working against the Tea Partiers by trying to muffle their screams to watch out! I hadn’t considered it before (because I had no idea) that we were approaching the level of indebtedness of the old Ottoman empire. Wow. Cut cut spend spend. No new ideas anywhere. How about requiring government to report on where it spends money just like it requires us to report how we make it? Wage slaves get their W-2, contractors get their 1099-MISC but isn’t it really time for the recipient of welfare, food stamps, section 8 housing, and medicaid to get their 1099-GOV?
“The deeper reason for France’s downgrading, however, is simply that France has been broke for years. And the real question is: Why has it taken so long for S & P and others to take good note of it ? After all, it is an open secret.”
Most of Europe (except maybe Germany, Holland, Norway, and Sweden) is broke. All of the social-welfare states are bankrupt and I think most of the leftists and liberals in the banking community just didn’t want to admit it. They had to start taking firm actions against the countries they so yearned for. Now with Greece about to go down in flames, along with Italy, Spain, Portugal, Ireland, and Iceland, they just don’t want to admit that “La Belle France” was just as bankrupt as the rest of them. And remember, these are the same ratings agencies that didn’t have a clue that we were headed for financial disaster in 2008. Some economic analysts they have there. Now they have to face the ugly facts about countries like France and actually DO THEIR JOBS by downgrading a country that should have been downgraded years ago. Because if they screw it up this time, then nobody is going to believe the ratings agencies anymore.
“Why has it taken so long for S & P and others to take good note of it ?”
Because all convenient lies must be supported as long as the useful charade can be sustained. The whole over-leveraged economic system is broke. Why should France’s condition be exceptional. The current level of debt cannot and will not be paid off. We are just jockeying for position for when the music stops.
Everyone knows the US is broke. Our nominal $16 trillion liabilities (equivalent to a years GDP) are in reality much larger than that.
http://www.fms.treas.gov/fr/index.html
The country is insolvent, and NY, CA and IL will go broke first. We can sell some assets (the feds own a lot of land for instance), but the baby boomers elected politicians that spent all the surplus revenues from socialism security buying votes today, and now there is nothing left for the future but unsecured promises to pay (aka govt bonds). Demography is destiny and it would be best to just take the haircut now. Sorry to all you folks who are depending on socialism security. Too bad, but we’re broke, so you’re SOL. You will have the votes to continue the vampirism for a while, but your children are going to cut you off. Soon.
The socialist/communist agenda is unworkable. This was known a long time ago but in the bid for control and power, who listens?
So by allowing the destruction of prosperity to become so evident, that none can sush or cover up, the real, underlining face is revealing itself. That being the blatent seizure of power.
Europe can not operate as a two-tired government body of one being elected and the other unelected. Because the people are ‘electing’ themselves into dictatorship.
The EU which was supposed to be a trading agreement, has illegally moved itself into the only authority for Europe and the UK. The EU has no elections and is unaccountable to anyone but themselves.
So the destruction of prosperity is actually something that works in the favor of the EU. They appear or seem to place themselves as the trading or business ‘saviours’ to the people. That is a lie. They are the problem.
But today the only real agenda of politicians to go through the motions of any election, is to run to the EU, pledge their loyal to dictatorship and grab all the perks and goodies, they rob the people of.
This article spells “hubris” incorrectly. Please fix
quickly.
Denninger, Schiff, Paul and a host of other have known it for years. Hard to hear to hear them speak amidst all the contented bleating from the sheep I guess.
“Everybody with a brain knew that France was broke. Nobody paid attention.”
Nobody in international finance has brain, or if they do they’re dishonest.
You do not need to look that far, one only needs to look closer to home. US debt is now at $16 Trillion, way more than France. On top of its debt, US has unfunded liabilities around $100 trillion and growing (social securities, Medicare & Medicaid, soon Obamacare, and etc.). Given that, which country do you think is more broke US or France? US is luckier that those rating agencies are based in US, otherwise the rating for US would have been worse than that of France and other countries.
Call that one of the benefits accorded to the US via it being viewed as a global reserve currency.
When oil, for instance, is no longer priced in US dollars, the days of the US dollar being a global reserve currency are either numbered, or in the rear view mirror.
Debt should not be compared to income, but rather to assets.
Unfunded liabilities are, like entitlements, a myth. Any legislature can change the terms of an entitlement. Any legislature can change the value of money, so that funds paid back are worth less.
The problem is if that approach is taken, private parties change the way they act. This is an old story. Emperor Diocletian complained that when he debased the coinage by substituting lead for silver, that his suppliers increased their prices. He thought it unfair.
US even has an impossible time making and living within a budget let alone reforming entitlements. Once the administration finally makes a budget and lived within it, then come back and let us talk about myth.
As long as Michael Lewis, and those he cites in his writings for Vanity Fair, and “The Big Short”, et al., are rowing in the same direction, all the bluster in the world will not save those who do not look good in the light shone by Lewis, et al., from their fates.
Part of the problem stems from Wall Street, part stems from government, and the rest comes from those whose appetites got too large.
This article is missing or glossing over a key componet of the underlying issue, the wolves were put in charge and made part owner of the chicken house.
The entire premise of public debt being rated by the same markets that design, trade and are invested in the instruments of that debt is flawed.
We as a society have deeper analytics, and by stronger I mean unbiased, in sabermetrics (baseball analysis) than we do in public debt and spending. Ideally we need to develop, implement and communicate the analysis of pubic debt, and spending on the same level.
Why the downgrade? They could no longer afford the bribes needed to maintain AAA?
The ratings agencies are as trustworthy as Goldman “shitty deals” Sachs, the simple fact is ALL of the Eurozone debt is JUNK as ALL their TBTF banks are insolvent (as are ours).
Over the coming years, sovereign debt will be the new subprime mortgages (with similar levels of losses).
BTW : The United States debt is also JUNK, does anyone believe we will ever pay it back? Not a chance in hell. We will default 100% on the debt when the time comes (in Obama’s second term).
The USA borrows over $46,000.00 dollars a second to keep the government going. This is not going to end well.
http://nation.foxnews.com/president-obama/2012/01/02/every-day-obama-regime-takes-6-billion-and-spends-10-billion
Foreign aid to countries composed of morons, free money to illegal aliens too dumb to make a nice country for themselves, food stamps for the endemic failures among us who nevertheless consider themselves too good and independent to live with their parents, grandparents, aunts or uncles, mountains of treasure spent of a permanent criminal class who think of themselves as political prisoners, offending the productive rich, funding Peter Pan programs about the environment while destroying the environment by the wholesale transfer of millions of people from the Third World.
Like America, European politicians and their cronies have figured out how to loot the system in plain sight while keeping the poorest quiet with funny money conjured out of nowhere.
Net result: the real money ends up in the hands of the rich and connected and the poor, after the feel-good flush of a pyramid scheme, are saddled with debt they can never pay off. By this time the generation of looters are old men who die in 4 poster beds with silk sheets and a 25 yr. old mistress.
It’s a silly and sarcastic take but how does one explain it otherwise: as people who don’t understand net loss over decades?
The entire EU should have been downgraded the moment they invented a monetary system whose value was dictated on a logic as sound as Unicorn farts
“The deeper reason for France’s downgrading, however, is simply that France has been broke for years. And the real question is: Why has it taken so long for S & P and others to take good note of it ? After all, it is an open secret.”
So are the US, UK, Belgium, Italy, Spain…Japan !
S&P is Soros’s tool to chose where his pawns should move on, it would have been fooled to attack directly Germany, as a surpluse country, but that have to fac a huge debt for the coming yer (up to 7 trillions euros), while were’s still at 16OO to 17OO trions euros, and I remind you that Spain had one of the lowest debt percentage, and though was attacked !
“The public debt grew from the present-day equivalent of 213 billion euros in 1978 to 454 billion in 1990. It then jumped to 740 billion in 1995, and grew again to 1.2 trillion by the end of last year. … ”
and the fault is attribuated to Pompidou (a former director of the Rotschild bank) and Giscard d’Estaing (his finance minister, appointed Bildenberg’s) who made the 1913 Fed’s coup, they sold our Banque de France prerogatives to private lenders
“The debt, as measured by the conservative French criteria, grew at a 100 billion/year pace during his five years mandate and is now over 1.7 trillion, while the GDP almost froze.”
yeah, guess why? we had to bail out our banks following the american housing bubble crash of 2008, and the euro crisis, which is still a aftermath result too !
almost froe, in 2O11, but quote a western country that had a better GDP growth, ach Ja, Germany, good ol Beggar that Neighbour ! hmm see Germany’s result at the end of 2012 too !
“Policies are rooted in culture, history, idiosyncrasies. Historically, the French are a predominantly continental, military, Statist nation, whereas their Northern or transatlantic rivals (the Dutch, the Brits, the Americans) are predominantly oceanic, commercial, and free -enterprise oriented.”
LMAO, glad to know that we are a militarist nation, so far we were labelled as “surrender-monkeys”, and that only the anglo-Saxons deserved this label !
I would say, that only the Dutch could be labelled as true commercial…
“As Statists, the French take the epithet sovereign more seriously than the noun debt. They may assess their debt, and nevertheless see it more a partnership of some sort than a liability. All they will insist for is the world market of finance to be disciplined, or regulated, to that effect. While the oceanic nations (and their late 20th century converts, the Germans) think that a debt is to be repaid in one way or the other, either by legal and contractual agreements or — beyond regulatory niceties — by the naked requirements of economic life.”
hmm so far, our statist nation did better than Germany in 2OO9, we had only-3,5% GDP groth, while Germany had 5%
http://www.economist.com/node/13610197?story_id=13610197
and escuse me, The Economist and some in DT don’t praise neoliberalism (european sense) anymore, but statism, like in China, Brazil… as the 21th century new economical miracle
http://www.economist.com/node/21542931
“Two excellent reasons not to support France too much.”
that’s why Merkel promised to support Sarkozy’s electoral campain !
Isn’t it odd that some like to paint France only with gloomy colors, and only notice the half empty glass
“As Statists, the French take the epithet sovereign more seriously than the noun debt. They may assess their debt, and nevertheless see it more a partnership of some sort than a liability. All they will insist for is the world market of finance to be disciplined, or regulated, to that effect. While the oceanic nations (and their late 20th century converts, the Germans) think that a debt is to be repaid in one way or the other, either by legal and contractual agreements or — beyond regulatory niceties — by the naked requirements of economic life.”
hmm so far, our statist nation did better than Germany in 2OO9, we had only-3,5% GDP groth, while Germany had 5%
http://www.economist.com/node/13610197?story_id=13610197
and escuse me, The Economist and some in DT don’t praise neoliberalism (european sense) anymore, but statism, like in China, Brazil… as the 21th century new economical miracle