It’s the closest the Eurozone has come to falling apart.
Marine Le Pen, the leader of the National Front, will get enough votes in April during the first round of the French presidential election but will be defeated in the second-round runoff in May, according to the polls. So at least hopes the French political class, and by extension the European establishment.
They’re hoping Le Pen would be defeated because she is campaigning on taking France out of the euro (after holding a referendum) and re-denominating the entire €2.4 trillion pile of French government debt into new franc. Then the government can just print the money it wants to spend.
There are some complications with her plan, including that the diverse and bickering French political class will unite into a slick monolithic bloc against her during the second round. And if she still wins, her government will face that bloc in parliament. But hey. And now people are seriously thinking about it.
Greece was on the verge of leaving the euro, but then within a millimeter of actually taking the step, it blinked and inched back from the precipice in the hot summer of 2015. And so for now still no one knows what the cost would be to leave… they can only grapple with the costs of staying.
In Italy, the Five Star Movement, which has been gaining momentum, is making noises about a referendum on euro membership. Italy has a special set of problems: It wants to bail out its banks but doesn’t have the money to do it; and it needs to devalue its currency as it had done so many times before it joined the euro, but has no currency it can devalue.
So the question of what it would cost to leave the euro is uncomfortably on everyone’s mind and lips – that’s how far this has gone.
One thing is clear: If a country leaves the euro and devalues its new currency, it practically must re-denominate all its existing government debt into the new currency because it would be impossible to service the euro debt with a devalued new currency.
The ratings agencies, with their eyes on those euro bonds, have already spoken up. Moritz Kraemer, S&P’s head of sovereign ratings, wrote in a letter published in the Economist on February 4 that Le Pen’s plan of re-denominating French debt into new francs would constitute a sovereign default:
There is no ambiguity here: it would. If an issuer does not adhere to the contractual obligations to its creditors, including payment in the currency stipulated, S&P Global Ratings would declare a default. Our current AA rating on France suggests, however, that such a turn of events is highly unlikely.
In other words, S&P doesn’t believe that Le Pen will get that far, and so they have not yet slapped a “D” for default on French government debt.
Moody’s too declared a few weeks ago that a re-denomination of French government bonds into new francs “might technically count as a default.”
Bondholders don’t like the idea of not getting “their” money – the euro – back when the bond matures, and they despise watching the purchasing power of their principal get watered down, as such a plan would do. They bought these bonds with ultra-low yields that had assumed that there wouldn’t be any of these risks.
Hence the “Le Pen premium,” a new term in the financial vernacular to describe the spiking yield spreads between German and French government bonds.
Now ECB President Mario Draghi is stumbling into the fray.
“The euro is irrevocable,” he told the European Parliament on Monday, to counter the populist rejection of the euro. “This is the treaty,” he said.
Which evoked memories of the good ol’ days of the sovereign debt crisis, when, to put an end to it in July 2012, Draghi said that the euro was “irreversible” and that the ECB was “ready to do whatever it takes to preserve the euro.” At the time, the Spanish 10-year yield was above 7% and the Italian 10-year yield was above 6%.
So now, same tune, different scenario. It’s not a debt crisis. It’s just a question of whether or not it’s possible to leave the euro, and if yes, how much it would cost.
And that question has already been raised officially. On January 18, Draghi had sent a letter to European Union lawmakers Marco Valli and Marco Zanni, telling them: “If a country were to leave the Eurosystem, its national central bank’s claims on or liabilities to the ECB would need to be settled in full.”
That was the opening – the IF. “If a country were to leave…” It meant that a country could leave! It was the first official admission that this was actually possible. It was just a matter of cost. That’s how Zani saw Draghi’s response. Bloomberg:
“I wanted to bring up the issue of exit from the euro and how it can happen,” he said in an interview before the testimony. “Draghi has now clearly admitted that such an exit is possible and now there is need to have more clarity about the cost. I’m sure that in case of Italy’s exit from the euro, benefits exceed costs.”
Alas, in his testimony before the European Parliament, Draghi refused to put a price tag on leaving the euro.
Valli asked him whether the “liabilities” Draghi had referred to that would “need to be settled in full” were the so-called Target2 imbalances. These are a result of payment settlements within the European System of Central Banks. They’d soared during the debt crisis to hundreds of billions of euros, a sign of the underlying financial tensions between debtor and creditor countries.
But Draghi dodged the question: “I cannot answer a question that is based on hypotheses, on assumptions which are not foreseen” by the European treaties, he said. “What I could do is send you a written answer which compares our Target2 system with the Federal Reserve-based system.”
Which was very helpful.
But even though he refused to put a price tag on leaving the euro, the whole exchange confirmed that it’s possible to leave the euro, though there is nothing in the treaties that mentions leaving the euro.
Other Eurozone central bankers are also trying to stem the tide, evoking soaring borrowing costs for France, if it chose to leave, and outright “impoverishment,” as ECB Executive Board member Benoit Coeure put it.
Whatever the ultimate costs of leaving the euro – they may be greatest for the holders of affected euro debt – for the Eurozone’s second- and third-largest economies, it has come down to just doing the math and making a decision. That’s the closest the Eurozone has ever come to falling apart.
Bonds are already falling, yields are rising, and NIRP is dying. Read… Markets Smell a Rat as Central Banks Dither
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Are there any creditor countries (other than Germany) left?
Someone told me all the debt belongs to banks, not countries!
China is the new creditor superpower on the block.
“China is the new creditor superpower on the block.”
NO china is the new printed toilet paper supplier on the block.
When they majority of the global financial system, clamors to but and hold that toilet paper, of its own free will.
Instead of having it forced on it, by the chinese forcing the IMF to put the CNY in the SDR.
You may have a point.
I would hold rubles, long before I would hold CNY as in a crisis the Russians might allow other Western nation’s to have some access to liquidity.
In a crisis the chinese will cut of western access to CNY liquidity, if it suits them to.
The desire and will of the CCP, trump’s law in china, still.
And probably always will, that’s the problem with china.
Further the CCP has been clandestinely printing and issuing CNY for decades and clandestinely monetizing its debt. This is why the true circulation # and debt levels in china are unobtainable.
Once enough of it is held by westerners the # numbers will come out and a massive implosion of purchasing power will occur, overnight.
They have done this before, they have been doing it ever since they first started using printed money.
They are the only nation I know of that has repeatedly made it punishable by death to transact business in gold or silver.
Whatever face is put on them, these debts are detritus from past neo-liberal economic policies and they will never be repaid. A sovereign again central bank can mark up the account numbers but it will be meaningless as there’s only the government’s good name to back it up, and that will be threatened.
Not long ago Draghi’s head would have been separated from the rest of him guillotine style by now. But with the advancement with technology today….
Greece will never come right while in the euro.they had there chance and toplas stuffed it big time,because the euro zone is not democratic,the us is more democratic but they stuffed up when the federal reserve was made independent of the government .the fed should be elected by the people every 4 years.we wouldnt be were we are today the people would have voted them out instead the majority have been screwed and couldn’t do a thing about it.the people of the erozone are looking at the ECB AND CANT DO A THING ABOUT IT .make it democratic or vote out .the first wont happen so its vote out and thats whats going to happen .
Geez Bruce you must be the emperor of your own little world…The FED was NEVER made independent, it always was independent…Giving me the choice beween John Gotti or Paul Castellano is NOT a democracy so no, we arent either….Yeah leaders SHOULD be elected but their not, every country is run by is strongest mafia group…And if you speak out loud enough against them, you will end up broke through legal proceedings or in the trunk of a car…All of this is a show..They want people/states/municipalities in the red because when your in debt to someone they call all the shots…Hence, the rulers want everyone in debt so they can tell you how when where to save/spend you money, amongst other things…I really like the comments on this website because it is clear that the majority of readers are well educated and experienced…Great stuff on FLA RE and coverage of Euro bank debacle, but it is also clear that your readers only have experience in the anglo-saxon/everything is controlled/police are everywhere to protect/ go to college you will succeed/ matrix….
HFT is a way to skim funds…Its been going on for 7 years..How much $ do you really think is left in the stock market?.. Virtu in its IPO had 1 losing day in its last 3 years….Remember, its only an auction so as long as one person has an elevated bid and another has an offer to match that, the price stands…Most cases both the parties with the bid and ask are members of a small banking cartel so they are there to support each other…. But ask yourself how much actual cash has been extracted over these last 7 years…How much money is really left in all the Pension Funds where the money managers have 7% growth factored into its growth outlook for the next 10 years…Remember the HFT scam is just a drop in the bucket; derivatives, etc…
Cue somone’s comment of how Im paranoid and everything that happens in this world is a coincidence and nothing is preplanned and no strategies to achieve total domination can ever happen because ulterior motives do not exist…….
if there is no competition, total domination can exist, but no empire lasts unless it is flexible.
money’s not fair, or is it?
Abolish the Fed. It is Treasury’s job to coin money. Let’s get on with the first trillion dollar coins!
I do not think one needs to have the Vision of a ‘Nostradamus’…….to see which way the ‘Populist Winds’ are blowing ACROSS Europe…Brexit was merely the beginning ‘Wind-Sock’…….
So,if all participating countries finally withdraw from the Eurozone, and default on Euro debt, doesn’t that make the Euro an unbacked fiat currency, that no one will trade in, or have I got it wrong?
Nope the “default” (LOL) case is that the Euro will revert to the “Teuro” (German for expensive) i.e. the Deutsch Mark. It will strengthen to where it should be spotted in cross rates and cause much Sturm und Drang in Germany. Oh yes, and most of the EU banks will fail and have to get restructured in the new native currencies. Ventimille lire for an expresso, once again.
Not sure why Herr Wolf is bothering to quote polls in the opening paragraph. Polling is now an extinct belief, much like Earth at the center of the universe, or the elites at the center of the NWO. Polling died of multiple wounds in 2016, as is clearly shown in the archeological record. In countries where voting for multiple parties is still possible, the much abused middle class, while too shy to voice their internal opinions in public, are clearly voicing their opinions at the polls. There will be shortly oportunities to be “heard” all over the EU.
The Real hot potato in France is the elections for parliament later in summer this year. Usually the left and right have played the game thus that during the second round the socialist or right candidate that did end second abstains and supports his/hers concurrent on the other side to prevent Front National from gaining a seat. Last elections ended in FN winning only a few seats. This year will be different, the French socialists are split into.at least 3 major factions, each hating each other even more.than they do hate the FN and this will probably prevent the usual tactics. France might end up with a parliament making France ungovernable.
The farmers and the unions govern France.
I am part French myself so it’s a good occasion to explain a few things: about 8% of the French workforce belongs to a union as per December 2016. That figure is below even that of the United States (around 11%) and well below the UK (26%). These numbers are a far cry from the days of the Fourth Republic, when over 30% of France’s workforce was unionized.
Even among civil servants, unions have experienced a spectacular collapse: right now less than 14% of France’s civil servants belong to a union.
The reason French unions are so powerful is they punch way way above their weight: not only they serve as joint managers of the country’s health and social security systems, but they are the sole legally authorized employee representitives in the workplace.
This for example has led to French firms choosing to stop at 49 employees to avoid having to deal with the dreaded “works councils” which are often, right or wrong, seen as causing trouble just because they can do so with impunity.
Very much like in countries like Italy and Belgium, firms often prefer expanding abroad to avoid dealing with archaic and migranious labor laws and unions often seen as nothing more than troublemakers.
Before you consider me an evil boss (which I am, guilty as charged: I have been called, among other less pleasant things a “slave driver”) consider this: which countries have the higher wages: France and Italy on one side or Germany and Japan on the other?
There is some information to gleem from Britain leaving the precursor to the Euro. The ECU which was all but the Euro in name. It blossomed.
This is worth watching regarding the Euro:
“The Great Euro Crisis BBC Documentary”
The technocrats who designed the Euro are the sort of people that have led the global economy to the new normal of secular stagnation.
They were full of the bright new neoliberal ideology that doesn’t work.
The Euro is wrong by design.
“The Euro is wrong by design.”
This is not so
the issue is simple.
The euro does not work, as you have currency union, without fiscal union.
There was not fiscal union, as fiscal union takes away financial sovereignty. With out financial sovereignty, a nation is not independent.
The Euro was another step toward the clandestine federalization of Europe.
The 08 crisis pulled the rug out from under the federalization by stealth program.
which is why this http://uk.reuters.com/article/uk-eu-future-idUKKBN15I2WP is also kicking around.
The Eur without club med, would be a lot more stable, and a lot higher in value.
You have agreed it doesn’t work in its current form and the German’s are in no mood to subsidise the rest now, so its never going to work.
“You have agreed it doesn’t work in its current form and the German’s are in no mood to subsidise the rest now, so its never going to work.”
You have agreed it doesn’t work in its current form and the German’s are in no mood to subsidise the rest now, so its never going to work long term in its current form.
The socialists have made the EU. And more importantly the Eur. To big to fast.
Expect consolidation, and tears in Club-med, when they have to start paying their own bills, and apply for work permits in the Eur nation’s.
Has to come, and will.
Every Club-med nation, the leaves, or is pushed out of the Eur, makes the whole situation easier to deal with for the northern states.
Federalization between dissimilar economies, with out force, is not possible.
Austria Germany, and others will retain the Eur, and federalize, in time.
The euro was doomed from the beginning because they didn’t have a common debt across the EU.
“The euro was doomed from the beginning because they didn’t have a common debt across the EU.”
Common debt across the union, is part of
“as you have currency union, without fiscal union. There was not fiscal union, as fiscal union takes away financial sovereignty”
Common debt goes hand in hand, with a common “fiscal policy” in a “Fiscal union”. You can modify it slightly like the US did, where there is state, and federal debt.
However the Federation control, has the power to take over the finances of a state.
What would it cost?
It would create lots of noise but little else in the way of bad events.
Debt must be repaid, you say? The ECB bought sovereign debt in good faith and, as a creditor, the debt must be honored, you say.
I say, sorry, but you are incorrect.
While true that the laws that make up the Eurozone state the ECB is more like a commercial bank that a central banks and that capital shortfalls must be covered by member nations. This is unlike Japan, for instance, where someday the BOJ will tell the Japanese Treasury that it does not have to repay the debt it owns so they can write it off.
Both the BOJ and ECB would have scandals but that’s about all. Since the cost basis for all debt purchased was $0.00, there is no loss. Remember, the central banks just printed it up. No actual savings was harmed or killed during the performance of the play. Nobody’s savings or actual wealth was impacted in the slightest (except for interest rate risk while debt is repriced as rates change). The scam is being closed down. The globalists who dreamed up the idea or printing money to subsidize social costs and low rates lost the game, but won every round up to that final end of the game. Perhaps they will try and do it again, hoping nobody notices?
Just as companies restructure debt when it can’t be paid, so will the ECB. The Eurozone countries should thumb their noses at the ECB repayment demands. The politicians who actually demand to make the ECB whole are likely paid flunkies of the globalists who dreamed up this free money stunt.
There are nine ‘Eurozone’ nations that are not tied to the ECB President Mario Draghi’s “Whatever it takes …” printing press:
As I have commented recently, many of the nations who are using the euro instead of keeping their own fiat currency as the above listed nations have, did so after a general referendum vote by their citizens.
The French vote was damn close. On 20 September 1992, the ‘French Maastricht Treaty’ was voted 51% in favor with a 70% turnout. Will the National Front win in April and reverse a quarter century of giving power to Brussels?
Viva la France!
Dan, I think some clarification is due:
“Eurozone” = the 19 of the EU member states that use the euro as their currency = Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, Spain
EU = European Union = all 28 member states of the EU, including the 19 on the euro and 9 with their own currencies.
Thank you. I was only on my first cup of coffee …
Greece was so close to sticking the EU in the eye, too bad it chickened out at the last minute. Now it’s paying the price with the misery and degradation of its citizens. Italy would do well to take note.
While you may lament the fact that Greece missed its FIRST opportunity to stick the EU in the eye….you can take solace in the FACT that Greece will HAVE TO EVENTUALLY do so. The situation in Greece today is almost exactly as bad as it was in the first round of the ‘crisis’…because nothing fundamentally changed other than the central bank ‘loaned’ Greece more money it couldn’t afford just so Greece could pay off the teetering-at-the-brink European banks. Using Greece as a transmission channel to funnel funds to the EU banks was too transparent and didn’t even have plausible deniability by the Greek gov’t that the additional debt was in the best interest of the public. Yes…the can was kicked down the road a little more (15+ months) but the abyss still exists….its just a matter of time before a new Greek gov’t takes the great advice of the former Greek finance minister and reintroduces a new drachma and revalues all sovereign debt. (The fact that Italy’s banking bailout is failing so fast only speeds the entire disintegration process…..not to mention the expected rapid turnover of EU country leaders who espouse the EU above their own national electorate’s priorities.)
“Greece was so close to sticking the EU in the eye, too bad it chickened out at the last minute. ”
Your anti EU and Euro, for the sake of it bias, is clouding your recollection of the true facts.
The greek Government wanted OUT. To enable it to devalue its way out of internal debt.
The greek people did not, as they knew it would put them back in the situation of having a worthless regularly devalued Drachma
Greece didnt chicken out, Dippy Tippy and Co, got their asses kicked, by the population.
Seems to me much of the genesis of this problem is due to the Triffin dilemma built into the Bretton Woods system. Other countries are supposed to hold dollars as reserves while the US holds gold. How are they to accumulate reserves without a trade surplus? And, of course, no country, the US apparently included, can be trusted with having sole control over the printing presses of an unbacked reserve currency. We’ve had these breakdowns before. It’s just that most of us living have no personal recollection, and people generally don’t learn from history. Alas, it’s our destiny to re-live past mistakes. The next 8-10 years will be very bumpy, to put it mildly. But at some point,finally, re-generation will occur. Our lot now is to go through the bad times. Better buckle-up.
The idea that Moody’s or any other ratings agency wouldn’t recognize a default is hysterical. I would like to remind everyone that the ratings agencies were the last to respond to the collapse of 2008. They refused to change the ratings even as the firms were collapsing. I would recommend everybody watch “The Big Short” again and again.
As for believing the polls in the French election, really? Even after Brexit and the US elections? Why not ask a French bartender what he thinks, much more reliable.
First, Right On, Petunia!
Second, we have Mario’s January 18 decree:
“If a country were to leave the Eurosystem, its national central bank’s claims on or liabilities to the ECB would need to be settled in full.”
Now, just exactly HOW does Mario intend to enforce his decree if say several countries were to simultaneously leave the EU, ditch the Euro and once again (back to the future) “print” their very own own fiat currency in their very own central banks?
Bartenders get up far to late.
They get their information from the bakers, yesterdays wine is acceptable, but fresh bread to go with it, is essential.
“As for believing the polls in the French election, really? Even after Brexit and the US elections? Why not ask a French bartender what he thinks, much more reliable.”
Brexit polls were within the margin of error.
Hillary Clinton won the popular vote (by millions), and lost the election due to the distribution of votes in a handful of states… I believe the difference, collectively between three or four swing states was less than 100,000 votes.
The polls were pretty close on both accounts, in reality.
I don’t know where Le Pen is polling, so if it’s very close then I wouldn’t count her out, but you’re acting as if the polls were wildly off, which is simply ignorant.
Maybe THE fundamental flaw in the Euro is the provision that all EU sovereign debt is exempt from bank capital reserve requirements. A Greek bond is equivalent to a German bund. This allowed banks to take ZIRP core EU monies and buy higher interest peripheral EU bonds with no impact to their balance sheet leveraging themselves to unheard of levels. That is why almost all of the Greek bail-out money went back to the German banks. You’d think Deutsche Bank would be whole again by now, but that does not seem the case. Nobody will be allowed to leave until the to-big-to-fail banks are saved.
With all due respect for Wolf, this article fails to inform us about a lot of consequences in case of these events taking place.
What would it mean for the value of the euro if any country is allowed to leave, renominate the debt in local currency and then of course devalue it?
What would it mean for the investors in government debt and the yield on debt?
If we consider that the level of debt is already high, what would a spike in yields mean? Would the governments be able to go in debt at all? What would be the consequences?
We’ve been hearing doomsday scenarios for the Euro for years and years, several books been written (Soros, Stieglitz), but is there anyone to really put a percent of probability on euro zone breakup, stand behind it and predict the consequences? Or is it just another juicy title, the one we’ve been hearing for years?
I’m well aware of a multitude of problems in the whole design of the Euro ( the differences in productivity, fiscal union, debt unification, cultural differences, different value of Euro preferred by different countries, demographic issues, immigrants, terrorism, geopolitics), but I’ve been waiting for years for an in depth, thorough and objective analysis of the problem.
all that target2 is so confusing, this makes more sense:
Renault: But everybody’s having such a good time.
Strasser: Yes, much too good a time. The place is to be closed.
Renault: But I’ve no excuse to close it!
Strasser: Find one.
[Strasser leaves, ending the conversation; Renault walks into the middle of the room and blows his whistle]
Renault: Everybody is to leave here immediately! This cafe is closed until further notice. Clear the room, at once!
Rick: How can you close me up? On what grounds?
Renault: I am shocked- shocked- to find that gambling is going on in here!
Croupier: [hands Renault money] Your winnings, sir.
Renault: Oh, thank you very much. Everybody out at once!
“Moritz Kraemer, S&P’s head of sovereign ratings, wrote in a letter published in the Economist on February 4 that Le Pen’s plan of re-denominating French debt into new francs would constitute a sovereign default:”
Of course it would. But so what? What happens if Le Pen pays off all of that debt with Francs and France is debt free? What are people going to do with those shiny new francs? By stuff from France (what else can they do?).
So French exports go up, debt goes down, employment goes up and France becomes very creditworthy. And even imagine if France decides to not issue debt to meet its financial obligations? It just prints and taxes. Why would France care about S&P ratings?
“Marine Le Pen, the leader of the National Front, will get enough votes in April during the first round of the French presidential election but will be defeated in the second-round runoff in May, according to the polls.”
That statement reminds me of the in-game Super Bowl win probability graph.
Is Marine Le Pen more like Atlanta or New England?
As I recall, Greece, in 2015, was ‘allowed’ to print Euros on an emergency basis to prevent it from quitting the Euro. It had no market access and the Troika was not extending further credit so, to keep the banks and economy functioning, the Greek Central Bank just ‘issued’ Euros on its own.
There was and is an ‘Letter’ identifying the origin of Euro notes much like a ‘mint mark’ on US coins but currency is a very small portion of each nations monetary base ( the ECB may rue the day it stopped printing 500 euro notes). Should a debtor nation leave the Euro system I suspect their national bank would keep on issuing Euros for as long as it could pass its ‘counterfeit’ Euros into the Euro System. This would mean that it would be the ‘creditor’ states that would have to abandon the Euro and re-issue D-marks, guilders etc. or accept Euro ‘crap’ from Italy, Greece etc.
“If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has.”
At this point, its in the best interest of the Euro creditors to compromise. Even if France were to swap Euro bonds with New Franc bonds, ‘technically’ default, and be rated ‘D’ by S&P, it would have no problem raising money.
Central banks cannot issue loans of any kind without collateral.
Otherwise, they become large, insolvent commercial banks … insolvent for the same reason as commercial banks: too much leverage. That leads to runs out of the system (which may be why the euro has crashed relative to the dollar = run out of the euro.)
GOVERNMENTS can issue ‘Greenback’ euros (or anything else) without the need for countervailing liabilities. A euro would be acceptable in the EU in the absence of anything else (meaning a non-payment) but only as a last resort. The problem there is banking laws specifically prohibiting government issue.
Leaving the euro is impossible b/c no replacement exists save for the dollar.
Dollar exchange w/ other ‘Brand X’ currencies would be more stringent than any w/ euro.
Meanwhile: euro = gasoline.
Can’t wait until the Europeans are forced by their cupidity / rapacity to stop driving …
So get on with it and default already. It’s inevitable regardless, and the sooner it happens the sooner countries like Spain, Greece, Portugal, Italy andFrance can pick up the pieces and restore their sovereignty.
If the French and Italians go for sovereign default on their bonds (which is only a matter of time), which are obligations to bona fide investors, then there is no reason why Britain cannot refuse to make its GBP60 billion divorce payments to the EU.
There is a maggi hiding inside may, Merkel knows this..
Euro-trash like junker are going to try and play hard ball with May.
End result being 2 years after Filing article 50, may will say
“C U Fella afer”
“what F money. We need to pay you???”
“We dont have a deal, and two years are up, our borders are closed, and WTO rules apply, Have a nice day old chap.”
Watch her, she does bite.
As various fake asylum seeker’s, who tried every trick in the book found. May is a bulldog. She works the strangle hold, until she punctures the opponents jugular.