Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
While technically not a sovereign bailout I am going to throw in Spain with the countries bailed out during the Euro crisis. Yesterday, Cyprus officially became the 5th country to ask for assistance, and obviously Italy has been in the crosshairs (somewhat unfairly as they run a fiscal surplus!) for a long time. [Ironically some news reports out today that Berlusconi wants to run again, this time with his campaign centered around bringing back the lira.] But France has been an unusual case for a long time, receiving a “free pass” if you will – as if they were Germany. Here is a chart from a few years back showing France’s debt to GDP is no different than that of Portugal – obviously they have a different economy with more means of production but it’s not exactly Denmark. [Feb 5, 2010: Sovereign Risk Chart – Where Would the U.S. Fit In, on Europe’s Scale?]
Interestingly, after Hollande came into power they have passed measures such as LOWERING the retirement age that are in complete contrast to what is happening on the rest of the continent. So it’s not surprise that France is pushing for ‘union’ harder than anyone else – after all wouldn’t you want to have “shared sacrifice” with Germany if your fiscal situation was not that much better than many of the targets of the market? Reuters has more in this piece.
- With a gaping public deficit and record level of debt, the euro zone’s second largest economy wants to be sure it is not sucked into the bloc’s game of debt-crisis dominoes, hence Paris’s forceful lobbying for ways to shore up Europe’s banks. France is one of the strongest advocates of a Europe-wide banking union and, with an eye on its own banks’ exposure to vulnerable debt in struggling countries, for immediate recapitalization of banks from euro zone rescue funds.
- “I think the French are pushing this for a simple reason: They bloody well know they’re next in line. They’re after Italy,” said Nicholas Spiro, head of consultancy Spiro Sovereign Strategy.
- Investors are currently giving France the benefit of the doubt, driving French yields to historic lows as they seek the relative safety of debt issued by a core European country that nonetheless offers richer yields than Germany. However, France’s finances are nothing like as good as Germany’s, and its banks have heavy exposure to Greece and Italy — a concern that has conditioned its response to the crisis.
- “It’s clear that pressure from the debt crisis will come on France and other AAA countries if there is not significant progress in mutualising risks,” said Michel Martinez, Societe Generale’s chief economist for France.
- Hollande’s Socialist government has thrown its support behind the idea of setting up a banking union in Europe, with a central supervisory authority, joint deposit guarantees and a fund to wind down dud banks. But France is also pushing for more immediate solutions that could shelter banks from the risks associated with the sovereign debt of southern Europe, fully aware that the crisis could deteriorate with lightning speed. Paris has been a vocal supporter of using the euro zone bailout funds to recapitalize banks directly, although Germany’s opposition to the idea remains a major obstacle.
- Apart from France’s own financial stress – its gross debt is about 90 percent of gross domestic product and rising – its banks have major exposure to the euro zone’s most fragile economies. French bank shares and the cost of insuring bank debt have closely tracked swings in Italian government debt spreads, hinting that investors see the banks’ fate tied to Italy’s struggle to avoid being dragged into the eye of the debt crisis.
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