New York, March 8, 2017

Dear Friends and Colleagues,

Evil spirits have again laid siege to the European continent. Based on the economic data, which is the strongest in more than five years, it should be a time of optimism and hope. But political uncertainty is dominating, and markets are clearly spooked by the considerable uncertainty around the outcome of the Presidential election in France.

Back in 2010-2012 we got used to the evil spirits repeatedly casting their nasty spells on European markets. The Euro-crisis only ended when the ECB committed to buying peripheral sovereign bonds, without limit, through the so-called OMT program.

Since, we had a couple of years, were markets were relatively stable. Yes, we had the occasional hick-up, such as SYRIZA’s victory in the Greek election in 2015. But in the end, Greece was too small to really rock the bigger European boat now that a better backstop infrastructure had been put in place (including OMT, ESM and even QE).

But, unlike Greece, France is not a small country. For the first time in the Eurozone’s history, a major political force has an explicit plan to exit the Euro (Brexit was about something different). The Front National’s views on the Euro are not new. But what is new is that the opinion polls are showing the Front National as the potential winner in the first round and on course to narrowing the gap in the second round. Even if the path to an actual Frexit has many more hurdles than just a Le Pen win, markets are suddenly starting to think in earnest about this risk and the redenomination of contracts.

I can see that clearly in my inbox. Over the last few weeks, I have been swamped with questions from investors, asking the once-unthinkable question (about the specifics of redenomination of contracts). Since I am not able to answer all the questions in person, I will refer to the following references, which provide my detailed background thoughts on the topic:

• Wolfson Economics Prize paper: “Rethinking the European Monetary Union” (Competition paper, 2012)

• The Fall of the Euro: Reinventing the Eurozone and the Future of Global Investing (Book, 2013) – Available at Amazon.com and jensnordvig.com

• “Cost and Benefits of Eurozone Breakup: The Role of contract redenomination and balance sheet effects in policy analysis” (Academic paper, 2014)

• “Legal Risk Premia During the Euro-Crisis: The Role of Credit and Redenomination Risk” (Academic paper, 2015)

I also did an interview with Realvision TV on this topic a few weeks back (Feb 2017). A summary is available here:

• Jens Nordvig: Cutting through the data for trading conviction

Without going into detail, the bottom line is this. Political tension in France (and perhaps Italy later on) is a very serious test to the Eurozone. In fact, a Le Pen victory on May 7 poses an existential threat to the European currency union. As such, the impact on markets is likely to be much more negative than Brexit was, not just for France, but to European and global markets more broadly. The basic reason is this. The prospect of Frexit will put the entire Eurozone the bail-out infrastructure into question, and shift assets across the region to a different and weaker equilibrium all-together.

Jens Nordvig
Founder and CEO
Exante Data LLC