COLUMN-If Le Pen pulls off upset, French bank funding, and euro project, at risk -James Saft


(The opinions expressed here are those of the author, a
columnist for Reuters.)
    By James SaftApril 20 (Reuters) - An unlikely Marine Le Pen victory in
French presidential elections could set off a bank funding
crisis that would have  more power to torpedo the euro project
than she might posses once in office.
    National Front nativist and anti-euro candidate Le Pen may
well not make it through to the second round on May 7 after
Sunday's vote, and is likely to lose to whomever she meets if
she does.
    If she does capture the Elysee Palace, she will almost
certainly face a fractured and intransigent Parliament after
June elections, particularly once the legions of French savers
work out what a redenomination into new francs will do to their
wealth. Le Pen's ability to pull France out of the euro and
re-negotiate its relationship with the European Union would be
severely crimped by constitutional and practical hurdles, which
make it highly unlikely.
    But markets, particularly those that advance money to French
banks, may not find this truth reassuring. Funding for French
banks is likely to be curtailed if she wins on Sunday, and
dangerously so if she actually takes office.
    "While it will be difficult for Le Pen to implement her
campaign promises even if she wins the election in May, it is
the expectation of major Eurozone upheaval, rather than the
reality itself, which makes the scenario of a Le Pen victory
significantly more complicated and dangerous for risky assets
than was the case after the Trump and Brexit surprises," Salman
Ahmed, chief investment strategist at Lombard Odier Investment
Managers, wrote in a note to clients.
    It may well be that a victory by leftwing candidate Jean-Luc
Melenchon carries similar, if lower risks.
    Should funds begin to leave the French banking system, not
just in panic, but out of an abundance of caution, the European
Central Bank has tools that would allow French banks over to
access liquidity. It could also tilt asset purchases toward
French bonds, thus delivering more cash to French banks.
    But this is not a frictionless course of action.

    TARGET 2
    The result will be a build-up of imbalances in the
Trans-European Automated Real-time Gross settlement Express
Transfer, or Target 2, system, which handles the banking system
credits and debts within the euro zone across national borders.
    As it stands, France is barely a debtor in Target 2, with
Germany the main creditor, and mostly to peripheral and weaker
euro zone countries like Spain and Italy.
    Within a normal euro zone framework the accumulation of
Target 2 balances is normal, and a helpful means for capital to
find its uses. At the point at which Germany begins to doubt
whether the money it is owed ultimately will be settled in
euros, or under what set of protocols, it will become
politically very difficult for Germany to allow the ECB, and for
the ECB itself, to build a massive Target 2 imbalance.
    "Political questions will certainly be asked before Germany
decides to increase its credit to other Eurozone countries if it
is clear that one of those countries, France, intends to leave
the eurosystem, potentially leaving Germany with a significant
fiscal loss on its claims," Ahmed wrote.
    "Were Germany to freeze the Target 2 system, the single
currency union would cease to exist even before a referendum on
France's membership takes place - highlighting the importance of
expectations in this situation."
    In March, Deutsche Bank estimated that the French banking
system has some 2.7 trillion euros, or 68 percent of the total,
of its funding that is vulnerable, either because it is from
outside the euro zone or because it is short-term, having a
repayment date of one year or less.
    Remember, too, that while it is sensible to expect the
French banking system to come under the most intense pressure in
the event of a strong Le Pen showing, it is not impossible for a
euro zone bank funding crunch to start elsewhere and spread. All
that matters, ultimately, is that intra-euro zone liabilities
grow at a rate alarming to the creditors at a time when there
are valid questions about the future of the single currency.
    Again, all of this is unlikely. Le Pen may not win, and if
she does, once in office may see sense in stepping back from a
policy that would beggar a substantial number of French
    A small bank run may do the trick, and the ECB and German
authorities may play along for a while to see if it does.
Small bank runs, however, are nobody's idea of a good way to
keep the euro project together.
    Politics over the past year, however, have been
extraordinarily unpredictable in prospect, and grimly
predictable in retrospect. France may be no different.
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be
an owner indirectly as an investor in a fund. You can email him
at and find more columns at

 (Editing by Dan Grebler)


This article appears in: Stocks , Banking and Loans , Politics

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