That theory sounds good to me — plausible enough that I wonder if you can apply it more broadly: If, for example, you can look at the unscripted remarks of politicians and deduce the real truth. I’ll give the theory a run in the United States when the election campaign heats up, but for now let’s give it a practice outing in France — just days before that country goes to the polls.

First up, some background. France is slap-bang in the middle of the Eurozone crisis. Its government deficit isn’t appalling — or at least, not appalling by U.S. or Spanish standards, which admittedly doesn’t set the bar too high. On the other hand, France’s debt-to-GDP ratio is a scary 86 percent. If you add on all its other undeclared liabilities (pensions, EU obligations, and so on), the ratio is way over 150 percent. And France has run a budget deficit for more than 30 years.

France also has some big international banks. Those banks are active in Spain (where the financial prospects are awful), Italy (no better) and indeed the emerging economies of Eastern Europe. If and when one of those institutions hits a major stone in the road, the French government will have the choice between watching a massive lender fail or putting its own financial solvency on the line. Either way, the fiscal impact will be horrendous.

So: scary times. Scary enough that you’d want and expect some somber honesty from politicians. But no. Nothing of the sort. The man most likely to win, Francois Hollande, has come up with a brew of policies — lowered pension age, new public sector hires, a tax on the rich that may touch 90 percent or more – that collectively have the feel of some retro 1970s-themed party, all disco balls and facial hair.

That policy cocktail didn’t work in the ’70s. It brought rocketing inflation, stagnant growth, collapsing exchange rates and public protest. And these days, the climate is far less propitious than it was. There’s more trade, China is fiercely competitive, the bond markets more open and less deferential and rampaging technological change (notably the Internet) has utterly altered the interconnectedness of markets. Meantime, France has lost control of its own currency. It can’t even print its way out of trouble.

So what does our study of the unscripted remarks of politicians tell us? Well, we may as well note straight away that it’s going to tell us more than a study of their scripted ones. Back when Sarkozy first ran for the presidency, he spoke it like he was for real. “Merit and labor should be rewarded more and more,” he said. “Globalization requires us to reinvent everything.” He spoke of a “rupture” with the past. He sounded like a French Thatcher.

Since he hasn’t, even remotely, governed that way, we may as well study the unscripted. And we start with a little room for optimism. Asked by journalists if Italy could repay its debts, he laughed out loud. Not as in a “of course it can, don’t be silly” way, but in an “Are you joking? It’s Italy!” way. That’s truthful, if hardly diplomatic.

Ohhh la la I know you will help me get re-elected if I help you ... baisers..

But Sarkozy’s tendency to honesty doesn’t seem to extend as far as an appetite for debate. Given a hard ride by some journalists in relation to a major current corruption scandal — hardly a topic that journalists ought to avoid — Sarkozy raged at them. Turning to one journalist, he said, “And you! I’ve no evidence against you. But it would seem you’re a pedophile. Who told me? I have an absolute conviction.” His diatribe lasted for 10 minutes, during which time he kept returning to his ugly analogy — then stormed off saying, “See you tomorrow, pedophile friends.” Nor is it just journalists he treats with disdain. He once told David Cameron, the British prime minister, that he had “lost a good opportunity to shut up.”

Voters get the same treatment. When a man refused a handshake at a French agricultural fair, Sarkozy snapped, “Casse-toi, alors pauvre con.” (You’ll need to translate that one for yourself. Just be warned that the BBC’s family-friendly version – “get lost then, you bloody idiot” — is not exactly word-for-word.)

Worse still, the man’s basic untruthfulness pertains even when it comes to the financial crisis — the issue which is (or should be) dominating French politics. Asked repeatedly by Spanish journalists about the effect of S&P’s downgrading of the French credit rating, Sarkozy twice refused to answer at all before stating abruptly that it “changes nothing.”

Yet the financial math says otherwise. The winds of crisis starting to blow once again round France’s nearest neighbors says otherwise. The slow ticking up of French bond yields says otherwise.

Truth is, if you want the most telling micro-expression of all, you could do worse than consider Christine Lagarde, former French Finance Minister and current head of the IMF. At a talk in Davos she held up her capacious Louis Vuitton bag and said, “I am here, with my little bag, to collect a bit of money.” It was a joke … only not. Her remark comes too close to the truth to be funny.

Show me the money!

And one other thing. When a political culture refuses to engage with journalists, which disdains voters, which act aggressively or dismissively towards close neighbors and allies — that culture has a rottenness at its heart. A rottenness that extends to corruption on an industrial scale. There have, in recent times, been major scandals touching presidents (Chirac, Sarkozy), prime ministers (de Villepin), high-profile ministers and political figures (Dominique Strauss-Kahn, Pasqua, Jean-Christophe Mitterrand, Lagarde). Not all those scandals are equally significant. Some of the investigations are still in process and all those involved have denied their involvement.

And yet. “Casse-toi, alors pauvre con,” is not something you say if you respect voters. And if you lose respect for the people who elect you, everything else follows. A political class that lines its pockets as the great ship of France founders on the rocks.

This was published in today’s Huffington Post.

He said, ‘The [Greek] problem is solved. How happy I am a solution to the Greek crisis … has been found.’ Which is good. Everyone, even presidents, deserves a little sunshine. 

Looking on the bright side: France’s President Nicolas Sarkozy should not think the eurozone debt crisis is solved

Alas, the weather in April is notoriously undependable. Sarkozy’s sunshiny mood probably didn’t survive too well when he heard the Greek Prime Minister admit that his battered little country might yet need a third round of bailout money. It probably darkened further when the markets choked on Spain’s most recent bond auction.

Nor will Sarkozy’s mood improve when he considers that the interest rate on Spanish government debt has risen relentlessly since the start of March towards unsustainable levels. The same thing has happened (albeit less abruptly) in Italy. Although France’s bond yields are still more or less OK, they too have started to nudge upwards from their recent permissive levels.

Setbacks of some sort are, sad to say, part and parcel of any President’s life: the price of office. But these things aren’t just part of the ordinary turmoil of politics. These are waves – still small, still gentle – lapping at the walls of France itself. Waves, which, if they rise to Spanish or Italian levels, could yet threaten the integrity of the nation itself.

And the mathematics looks dire. The official debt to GDP ratio of the French government is around 86%, which is higher than in Spain and Britain, if not yet at Italian or Greek levels.

Only that word ‘official’ hardly gives you that warm, fuzzy glow of truth, does it? Because France also has liabilities of hundreds of billions of euros via the EU, not counted by the official stats. Add those in, and you get to a debt/GDP level of more like 145%. Add in the present cost of future pension liabilities, and you’ll be way over the 200% mark. Add in the cost of bailing out France’s own creaking banks, in the event of meltdown elsewhere in Europe, and you’ll be getting to figures that the country cannot possibly pay.

Parallel reality: Socialist candidate Francois Hollande has promised to increase public spending

These facts aren’t hidden. It takes a bit of detective work to dig out the exact data, but there are plenty of detectives out there. That’s why Standard & Poors removed their AAA credit rating from France. That’s why French borrowing costs are almost double German ones (and one-and-a-half times British ones). All this as France is facing a general election. The first round is next week.

You’d expect the election to unfold in sombre fashion. When Britain held its last election, also deep in the shadow of financial crisis, all three candidates for Chancellor said in a TV debate that they would impose spending cuts deeper than anything forced through by Margaret Thatcher. You might expect that kind of honesty from French politicians now – as those bond market waves go on lapping.

But no. France’s politicians live in some parallel reality of lowering pension ages, hiring gazillions of new public sector workers… and all paid for by a 75% tax on the rich which (when various other levies are added) will be nearer 90%.

Didn’t we try these things already, back in the 1970s? And didn’t we try them in an era when bond markets were less powerful? When trade was less open? Before globalising technological changes, most notably the internet? Before China had opened? When rich people were less likely to hop on a plane and work elsewhere? And you remember the results: strikes, deficits, inflation, the three-day week and the death of growth.

Sarkozy once said to David Cameron, ‘You have lost a good opportunity to shut up.’ Alas, Sarkozy is currently losing a good opportunity to speak the truth. To his electorate. At a time when the stakes are higher than ever.

And here’s another thing. Wherever you have a political culture with a blatant lack of transparency and honesty, you also have one with a total lack of accountability. Among the senior French political figures who have been enmired in scandal are Sarkozy himself; his predecessor, Jacques Chirac; former Prime Minster Dominique de Villepin; IMF chief (and former Finance Minister) Christine Lagarde; Charles Pasqua (former Interior Minister); Jean-Christophe Mitterrand (son of a former President and his political advisor); Dominique Strauss-Kahn (head of the IMF and once expected to be a leading candidate for the presidency) – and too many more to name. Some of these have been found guilty. In some other cases, investigations are still ongoing (and all those charged deny the allegations).

But in general, where there’s fume you’ll often enough find a feu. You can’t have this many corruption scandals and not believe that the fundaments of the politics are broken. Those bond market waves may be destructive, but there can be creation in destruction too. The French political system is broken. Maybe these waves will eventually wash it all away.

Since France has high government debt, a gaping deficit, and a seeming incapacity to balance its budget, those questions are pressing now in a way they haven’t been for thirty years.

So I thought I’d call a contact of mine – a highly placed source in the interbank markets and a person who has his finger on the pulse of who’s lending what to whom. What he had to tell me was shocking:

• Two to three months ago, lenders unofficially suspended their trading lines to French banks. It wasn’t like the panic of 2008, when people rushed to sell their risk at whatever price they could get. It’s been slower than that, but more insidious. When loans mature, they are not being renewed. In effect, it’s become almost impossible for French banks to sell their long term paper [ie: to raise money by selling Certificates of Deposit or IOUs.]
• Some of the major French lenders are offering interest rates at twice the going rate in the market for other credits- yet there are very few buyers of their paper, even so.
• What little lending is still taking place tends to be for very short dated maturities – that is, French banks can still borrow for up to 10 days, but are very pressed to borrow in ANY significant amounts for three months or longer.
• Loan volumes have also plummeted. Where once traders were doing deals in the €200-300 million per deal bracket, now they’re more likely to be doing tickets in units of €20-30 million, if they are lucky. For larger institutions, who previously dealt in amounts of €2,000-3,000 million, volumes have been pegged right back to €200- 500 million.

I asked about UniCredit – the Italian bank we wrote about here – and he laughed. He said to me, ‘UniCredit has no buyers in the interbank market at all’. I suspect that was a slight exaggeration, but only slight.

The simple, sombre fact is that the European banking system is in crisis. The meltdown has started and it has a long way still to run. No wonder Sarkozy’s hair has turned 98% grey or silver in photo’s appearing in this weekend’s Sunday Times story on DSK.

Although other ratings agencies have confirmed their AAA rating of France, we would like to call your attention to the fact that no one believes them. Bloomberg’s story, here, calls attention to the fact that:

“Investors aren’t waiting for Standard & Poor’s or Moody’s Investors Service to strip France, Europe’s second-biggest economy, of its top credit rating.

The extra yield demanded to lend to AAA rated France for 10 years was 158 basis points more than the German rate at 11:51 a.m. today. The gap was 200 basis points on Nov. 17, the widest spread since 1990, up from 28 in April. The French 10-year yield was at 3.5 percent, about midway between top-rated Holland and Belgium, which is graded one level lower at Aa1 by Moody’s. French borrowing costs are more than a percentage point above the AAA rated U.K.”

Bloomberg aren’t quite going to say this out loud, but the point is simple. If it looks like a dog, and barks like a dog, and wags its tail like a dog, you can pretty much bet that it IS a dog.

The same thing with bonds. If the markets trade French debt like it’s not really AAA, then that debt isn’t AAA. More scary still, we haven’t yet had a glimpse into the huge losses concealed inside the French banking system. Once those come into the open, we’re going to see that even at their current distressed prices, French bonds have a long, long way to fall. It ain’t over till it’s over – and the fat lady has yet to sing.