Blain’s Morning Porridge 7^th October 2025 : A tale of two cities – Paris and London

“…it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us…

The debt crises that apparently threaten to engulf Paris and London are very, very different. Paris is in genuine financial and market trouble. London has a perception problem.

Both crises are rooted in political/fiscal miscalculations and the widening polarisation between political populism and conventional politics. The crisis in Paris is very real, but the one in London is largely driven by Doom-Scrolling financial misdirection of doubtful right-wing provenance, looking to snipe the centrist Labour govt.

Before you read this morning’s Porridge, bear in mind my key Blain’s Market Mantra No 2: “Things are never as bad as we fear, but seldom as good as we hope.”

“The French are revolting” is always a great opening line to start the day! Paris faces a genuine debt crisis on top of an apparently irreconcilable political impasse. The collapse of cabinet negotiations between Left and Right triggered the resignation of yet another forgettable prime minister (even shorter shelf-life than Liz Truss), plunging France into the brutal reality its lack of financial sovereignty (as a member of the Euro) and recent debt downgrades leave it looking at the edge of a financial precipice about to step forward.

It’s all terribly dramatic, but even I expect the French the situation will ultimately. be resolved. Internally, France may be a political Donnybrook, but the ECB can’t afford European sovereign contagion risk, or a French debt crisis to trigger wider recession. At some point, French OATs may become a screaming buy!

In contrast, London has a debt and political perception gap. There are multiple semi-informed Doom Scrollers drowning the right-wing media, SubStack, and Linked-In with lurid tales about imminent default, a Gilts meltdown, an IMF bailout, or the complete collapse of the nation. Some of the stuff makes me giggle in its utter ignorance and inventive mistruths. They all pretty much skip details but most say Chancellor Reeves’ alleged incompetence means she can’t balance the November Budget without the UK exploding in a debt Armageddon.

Whateva..

It’s all terribly riveting and salacious stuff – and utter bollchocks. The reality is the Gilts market is robust and resilient in the face of pretty much normal UK political dither. (If I find the time I will write a follow-up Porridge debunking the multiple unfounded rumours and sighs about the imminent death of the Gilts market. The problem is they find traction in the  swirling self-obsessed gloop of right-wing frustration that Labour had the temerity to win the last election.)

Before I go onto explain Paris and London’s particulars, let zoom out a couple of billion miles.

Blain’s Virtuous Sovereign Trinity Theory postulates three factors for a successful economy; i) currency stability, ii) a sustainable bond market, and iii) political competency. It assumes a nation has financial sovereignty – meaning control of its own budget process and the keys to the monetary printing press. The UK has financial sovereignty. France does not – it is beholden to the ECB and Brussels.

When it comes to full-blooded bond market crashes, there are actually very few historical examples involving leading financially sovereign global economies. To the best of my knowledge, there really has not been a major Western Government Bond destabilising default crash in modern times. (There have been many sharp sell-offs!) Yes, we saw the USA experience brief technical defaults in the 1930 when the President came off the gold standard, and in the 1970’s when payments were missed during a Govt shutdown.

Italy flirted with crisis innumerable times in the politically volatile 1970s to 2000, but otherwise debt crises have been in emerging nations; Turkey, Mexico, Brazil and repeatedly Argentina. Russia is a serial defaulter – but hardly counts as a major global economy. These EM crises have been triggered by nations borrowing in currencies other than their own, and being unable to repay without creating massive domestic currency collapse.

A financially sovereign nation issuing debt in its own currency will not default. It will repay debt by printing money. That will be inflationary and may collapse the currency – fraught with consequences, but it won’t default. It will mean interest rates will rocket higher to entice buyers to refinance maturing debt. That is why successful financial sovereign nations are prudent.

There is the Ken Rogoff / Carmen Reinhart derived “Rogoff Rule” that a nation will start to decline once its debt exceeds 90%, by crowding-out growth and creating fiscal instability. 90% looks an arbitrary number and no one had provided much of a proof. The UK’s debt is currently 98% while France is around 114%. (Japan is at 235%!) The key thing is a nations bond yield (a function of demand and supply) sets the risk-free rate off which all other financial assets in the economy are priced – mess with the risk-free rate, and consequences will disrupt the whole economy. We saw that clearly during the QE era when interest rates pitched too low triggered massive inflation in financial assets, but very little real investment.

Without doubt the most interesting crisis I was directly involved in – broking large blocks of bonds – was the European Sovereign Bond crisis of the early 2010s. That was a crisis about nations that suddenly discovered they lacked financial sovereignty. Greece and other Euro nations made the schoolboy error of thinking their overly hasty membership of the Euro had somehow made their BBB domestic economies into AAA investment grade credits. They borrowed to the max and then struggled to repay as they discovered their unreconstructed economies were using another nation’s currency (the Euro), leaving them crippled. It triggered PIIGS contagion across the bonds of exposed European Sovereign credits: Portugal, Ireland, Italy, Greece, and Spain.

That crisis led to destabilising political dither as domestic European political leaders tried to dodge any notion of “joint and several liability”. The idea that German workers would pay the pensions of Italian hairdressers was never politically acceptable. It was resolved by the genius of ECB head, Mario Draghi using unlimited bond repos (effectively standing the ECB squarely behind European Sov Debt and wobbly banks) and his “do whatever it takes” speech! Draghi’s words should stand alongside Winston Churchill’s “fight them on the beaches” comment as a pivotal moment in Europe’s history.

Now, the EU and ECB notionally set what European nations can borrow and their debt metrics – but it’s a fudge. No one really wants to test “Debt Sovereignty” between Brussels and Nations. It is a problem caught up in the complexities of completing fiscal union alongside monetary union, in a political union Brussels wants, but the rest of Europe is electorally disinterested in.

France’s problem will be persuading Europe to stand behind it to continue to borrow – without creating a politically unacceptable picture of France being bailed out at the expense of the stronger Norther Economies. But the fudge will be found. At a time when political and defence unity is required – it’s critical to Europe’s future. As noted above, the opportunity for windfall gains in French bonds may present itself.

The situation in the UK is profoundly different.

At present the gilts market is under attack to a degree I’ve never seen through my 40-year career in bonds. The problem is partly of the centrist Labour government’s own making and misjudged fiscal plans. Although they had years in opposition to learn from the multiple mistakes of the Tories, particularly Liz Truss, Kwasi Kwarteng and Rishi Sunak (lovely, mostly harmless chap, but a hapless chancellor and even more dithering prime minister), Labour came into office unprepared.

Rather than use the strength of their majority to present a robust and costed plan to markets to cover the “funding black hole”, and to start rebuilding “broken Britain”, thus avoiding recession-triggering tax rises, they abased themselves to placating the bond market with strict adherence to rules, and trapped themselves with promises of no tax-rises to the electorate. Mistakes were made. Party indiscipline then exacerbated the crisis by denying the government a majority to slash and reform overly generous and unpoliced welfare spending (which, lest we forget was largely put in place by the previous Tory administration.)

Now Labour find themselves trapped. Unable to borrow more in fear of the bond market. Unable to tax more in fear of electoral wipe-out and recession. Their options are limited. But it is not a fundamental crisis of the existence of the UK state or the Gilts market. It’s a continuation of the same fiscal problems the UK has been facing for decades – balancing spending vs taxes and government. The right wing would have belief its terminal. It is not. Labours crisis today is pretty much a continuation of the last 50 odd years. Get over it.

There isn’t time this morning to go through the multiple issues being cited for the imminent collapse of the Gilts market by the Doom-Scrollers of the Right wing. There is certainly no crisis apparent in the market itself where Gilts auctions have been well oversubscribed. That will no doubt cause someone to claim “well, that might change!” Whataboutism is no substitute from proper analysis.

More to follow on gilts – and why you should probably not lose sleep over them – later this week (time permitting.)

Out of time, and back to the day job…

Bill Blain

CEO – Windshift Capital

Author – The Morning Porridge

Partner – Shard Capital