France hit by eurozone storm

Updated: 
Sarkozy, flagItaly's debt costs may be horrendous, but France's debt costs are also on the up. It's not so much the actual price of the debt that matters but the 'spread'. That is, how much distance investors in German debt - considered safe, given the solidity of its economy - will pay compared to investors in French debt.

Yesterday German yields slipped to under 1.8%. But French yields rose to 3.48% on 10-year bonds.


Contagion

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.

Reforms

New 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.

However France's finance minister, François Baroin, has extended the ban on short selling of bank shares introduced mid-August for another three months. The general French worry was compounded yesterday by ratings agency Standard & Poor's mistakenly releasing a note stripping France of its gold-plated AAA credit rating.

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.

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