Yesterday German yields slipped to under 1.8%. But French yields rose to 3.48% on 10-year bonds.
This 'spread' is widening, now more than 160 basis points. Roll back to April and the spread on Italian debt was just 1.2%, but it's now close to 6%! It's one thing to give up on Greek, Spanish and Italian debt. French debt is another thing. That thing is called Contagion.
French banks are indeed indebted and in trouble. Many have loaned more than they should to Greece, Eastern Europe and Italy. Much of the Greek debt will be written off. But loans to Italy are a different issue, given their vast number. There's only so much you can afford to write off.
ReformsNew French industrial production figures have also given investors cause for the jitters. The pressure is on for Sarkozy as buyers of government debt are increasingly concerned that the French president is simply not implementing austerity reforms fast enough, and broadly enough.
France is also a guarantor on the eurozone rescue fund. The pressure on France's resources is growing fast. If Standard & Poor - or any other agency - release a genuine downgrade note, then contagion could really shift up a gear again.