|Source: Bloomberg.com (h/t business insider)|
Moody's currently has France rated at Aaa, but there's speculation that guaranteeing toxic sovereign debt in the EFSF would result in a downgrade (and lower the amount of guarantees). All of this news caused the 10-year French OAT - German Bund spread to break out and hit a 20 year high. FT Alphaville has the 20-year chart. There's an EU summit on Sunday where decisions will be made ("Merkel Says EU Summit Will Be Important, Not Final, Crisis Step"). We'll see what happens. What about China, Brazil and India providing support. Here is some information to arbitrage.
Moody's on France:
"However, Moody's notes that the government's financial strength has weakened, as it has for other euro area sovereigns, because the global financial and economic crisis has led to a deterioration in French government debt metrics -- which are now among the weakest of France's Aaa peers. Moody's nevertheless continues to deem France's financial strength to be very high, particularly when compared with debt affordability (interest burden in relation to government revenues) which remains comfortable. But very high debt finance-ability in an uncertain financial and economic environment, which is a crucial feature of Aaa governments, rests on investors' confidence in the government's ability and in its willingness to tackle unforeseen challenges. France may face a number of challenges in the coming months -- for example, the possible need to provide additional support to other European sovereigns or to its own banking system, which could give rise to significant new (contingent) liabilities for the government's balance sheet.
The deterioration in debt metrics and the potential for further contingent liabilities to emerge are exerting pressure on the stable outlook of the government's Aaa debt rating. Moody's notes that the French government now has less room for manoeuvre in terms if stretching its balance sheet than it had in 2008. France's continued commitment to implementing the necessary economic and fiscal reform measures as well as visible progress in achieving the targeted sustainability improvements will be important for the stable outlook to be maintained. Over the next three months, Moody's will monitor and assess the stable outlook in terms of the government's progress in implementing these measures, while taking into account any potential adverse economic or financial market developments."
Articles on France, the EFSF and related:
- Leveraged EFSF Doomed to Fail (EuroMoney)
- Reflections on the latest Eurozone tape bomb (FT Alphaville)
- A Trillion Euro Insurance Policy for the Common Currency (Spiegel)
- France Risks AAA on Expanded EFSF Bailout Fund: Euro Credit (Bloomberg)
- EURO GOVT-French yield spread widens on ratings warning (Reuters)
- EFSF could aid states with interest payments-German paper [China mentioned] (Reuters)
- RBS Joins Citi In Blasting "EFSF As A First Loss Insurance Guarantee" Plan (Zero Hedge)
- EFSF – A very European monoline (FT Alphaville)
- French-German Yield Spread Widens to Most Since 1992 on Moody’s (BusinessWeek)
- French bond blow-out, chart du jour [updated] (FT Alphaville)
- Contagion inevitable If EU crisis spreads to banks: Gordhan (Reuters)
- Your deterrent is my bluff (FT Alphaville)
- Spain downgrade ups pressure on EU to act (Reuters)
- Europe Banks Vow $1 Trillion Cuts as Recapitalization Looms (Bloomberg)
- Greece default risks forcing Greek banks to become nationalised (Financial Mirror)
- Collapse In French Bonds Implies EURUSD Now Rich By About 1300 Pips (Zero Hedge)
- BOE Voted Unanimously to Expand QE to 275 Billion Pounds (BusinessWeek)
To monitor more spreads to German bunds, visit this post with links to quotes and charts.