Frexit: The End Of EU Starts May 2017

by: Elazar Advisors, LLC

50% of the EU are on their way out.

The ECB's endless bond buying would have to come to an end.

The French exit is the next clear and present reality.

First there was Brexit. Soon to come could be Frexit, Grexit, and Italexit and maybe Dexit (German Exit). This could close the doors on the euro, the ECB and all that bond buying. This could cause interest rates to rise and bonds to drop.

Le Pen

In France, The National Front's Marine LePen's chances of winning jumped when scandal was discovered from the more moderate candidate Francon Fillon's wife Penelope. His wife allegedly accepted money as a parliamentary assistant despite having no role.

As of early February polls showed Marine Le Pen had a lead with 25% support.

Bookies showed her the most popular candidate taking 60% of all bets placed for her to win.

If Le Pen wins, she wants France out of the EU (Frexit). She wants to start printing French francs once again.

So Long EU

As we know the UK was the first to go. Italy, Spain and Greece have also threatened to leave.

But the leading candidate in France is now making this a near and present reality. France is the largest country behind Germany (and the UK) in the EU.

She said,

"If I am voted in, I will announce that a referendum will be held in six months time. I will spend those six months going to the European Union and telling them: 'I want the French people to regain at least their territorial sovereignty because I want to control the borders - they don't belong to you.'"

We've seen with the UK exit that borders and economics go together. The EU has not been interested in piecing out benefits of the EU. For that reason Le Pen's policy is to exit because of her demand to control France's borders.

French Bond Market

Source: Trading Economics

You can see above bond traders are preparing by selling French government bonds. Yields are moving up.

Compare that to Germany where yields were moving down recently.

Source: Trading Economics

You can see German bonds are being bought as the yields drop. French bonds by comparison are being sold thus the yields are rising.

Investors are paying attention to the potential for Frexit.

The End Of The EU

Country Debt To GDP GDP(B$US) %of EU GDP
Germany 71.0% 3363 20.6%
UK 89.0% 2858 17.5%
France 96.0% 2418.8 14.8%
Italy 132.0% 1821 11.2%
Spain 99.0% 1199 7.4%
Netherlands 65.0% 750 4.6%
Sweden 43.0% 495 3.0%

Source: Trading Economics

Above you see the largest members of the EU.

The UK is already on its way out.

After Germany France is the next largest.

We know that Italy and Spain political parties are looking to exit the EU and are also gaining momentum.

That means, based on GDP, about 50% of the EU GDP is about to exit the EU.

Market Impact

If Le Pen wins the euro should drop as there will be decaying demand for the currency. 15% of the EU will stop using euros.

Just like we saw French bonds drop, we'd expect euro-zone bonds to also drop.

The ECB's record buying spree of euro-zone country bonds would have to come to a halt.

If 50% of the euro-zone's GDP is about to leave based on election momentum, then the ECB will likely have to stop buying those country's bonds.

They will also have a lower capital base from which to buy.

The ECB's quantitative easing amounts would most definitely decrease. That would take a huge buyer away from markets.

Scariest Quote Of 2016

We take you back to the scariest quote of 2016. Deutsche Bank's president John Cryan said,

"People are holding on to assets, and there's an irrational buyer [ECB] by definition in the market. It'll buy anything at prices set by a market that isn't setting prices, and where there's no dependable liquidity."

"And there has absolutely been no price discovery now in corporate bonds, so we don't really know the price of credit, which is a dangerous situation."

When 50% of the EU exits the ECB will have to back off their "irrational" buying. Mr. Cryan's fears of price discovery could be catalyzed by Le Pen's win.

Catalyst Dates

The first round of voting in France will take place April 23rd. The run-off and deciding vote for the next President of France will be May 7th.

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