In today’s issue:

  • Why French elections are crashing markets
  • Liz Truss became a martyr… for the European establishment
  • Reform and Trump had better watch their bond market backs

Can you hear the Greeks giggling? It’s schadenfreude. And they’re laughing at you. And the French, if that’s any comfort.

Back in the 2010s, the Greeks were the ones at the centre of the global debt crisis. The Troika humiliated their government. And ignored a referendum. The EU, European Central Bank and International Monetary Fund imposed austerity against the will of the people and its politicians.

And people think they live in a democracy…

Dortmund football fans waved 50 euro notes at their Olympiacos opponents. A reference to the bailout the Greeks were asking the Germans for.

The Germans only agreed to bail out the Greeks on the condition they spent the money buying German submarines. An interesting iteration of historical German foreign policy.

The Italians joined in the fun in 2018 by electing a Eurosceptic government to take on the EU in budget battles. And they lost too. Each time they attempted to fulfill their democratic mandate, bond yields surged. And then the government retreated.

The Italian instability unleashed the worst performance for financial markets since 2008. But it was all papered over in the end.

Or so we thought.

But the Europeans are back at it. And the new posterchild of what not to do is… us.

Well, Liz Truss.

Liz Truss is a martyr… for the European establishment

I’m sure you’ll remember the mini-budget that caused a big backlash. Tax cuts without spending cuts cost money. That’s what “unfunded tax cuts” means.

The UK bond market tanked. A panic at pension funds using derivatives turned it into a crash. And the Bank of England waited five days before announcing a “gilt market operation” to rescue their harshest critic, the prime minister.

She’d been railing about their inflation and even proposed reforming the Bank of England. But the Bank got her instead.

You might think all that is in the past. But what if it was just the beginning? What if Liz Truss’ fate signalled plenty more to come?

The Greek debt crisis lasted many years.

The Italians took on the Troika in 2018, unleashing financial chaos.

And now…

The French are next

After a drubbing at the European Parliament elections, French President Macron announced national elections. The right-wing National Rally won by a margin of 2-1 over the nearest two rivals at the European elections. They are polling almost as high at the national level.

Financial markets responded to news of the European Parliament election result and upcoming French national election in ways that take you back to the Greek and Italian debt crises.

Remember all the talk about “bond spreads”? The difference between Greek and German bond yields. Or the difference between Italian and German bond yields.

Well, now it’s the French bond spreads you’ll be hearing about. Bloomberg pulled out the story they’ve been publishing for more than a decade now, just for a new country (emphasis added):

French equities posted their biggest two-day decline in a year as banking stocks fell along with the country’s bonds amid the turmoil. France’s benchmark CAC 40 Index ended the session 1.3% lower, bringing the total decline over the past two days to 2.7%.

The yield on 10-year French bonds jumped as much as 10 basis points and widened the spread over equivalent German bonds to the highest level since March 2020 on a closing basis.

My emphasis points out that we’re pricing in a severe debt crisis in France already.

Wait. A bond crash? Cue the Liz Truss reference…

On Tuesday, the French finance minister warned France could face a “Liz Truss scenario”. Unless you vote for him in the upcoming election, of course.

In 2023, the Telegraph warned the same for Italy: “Giorgia Meloni risks going the way of Liz Truss if she keeps defying the market.” And, “Italy’s bout of August madness is in some ways worse than Britain’s Trussonomics episode.”

It’s not just the Europeans, by the way.

Labour and Trump had better watch their bond market backs

In March, the head of the Congressional Budget Office warned the US could face a Liz Truss moment too: “The danger, of course, is what the UK faced with former prime minister Truss, where policymakers tried to take an action, and then there’s a market reaction to that action.”

The US’ debts and interest expense are going exponential. It’s only a matter of time before the bond market reacts to something. And someone gets the blame.

Who do you think it’ll be? Somone unpopular with the elites? Someone who has been criticising central banks for inflation? Someone who wants to cut taxes?

Speaking of which, the Bank of England came out against Reform UK’s plan to cut interest on bank reserves to pay for its proposed tax cuts. If you didn’t understand it, don’t worry. It took me a long time. And that’s after years researching the topic.

Reform UK is pitching itself as the opposition party. But as El País wrote in 2023, “Giorgia Meloni, Liz Truss and others find that capital markets can be more powerful than opposition parties.”

Bond markets rule governments. Labour had better take note. You never know where the bond market vigilantes will strike next.

That’s the politics, anyway. What about the investment implications?

Does all this mark the beginning of another debt crisis? Are we in for another decade of government bond instability roiling stocks every few years? Was Liz Truss just the beginning?

I’m not convinced that’s the right way to think about the situation. The upcoming issue of The Fleet Street Letter has a different take.

More on that soon.

For now, consider how the European elections have created an outstanding opportunity.

One last thing. Tomorrow, the best writer I know will reappear in your inbox. Bill Bonner’s tale of chainsaws, the IRA and an incredibly dull opera cannot be missed. Be sure to check it out.

Until next time,

Nick Hubble
Editor, Fortune & Freedom