Which eurozone country's debt has been most volatile over the last two days? No, not Italy's

While the yield on Italian bonds stabilised at just below 7%, France's has been rising to a record spread over the German bund

by Nils Prateley

the Guardian,

Question: whose 10-year bond yields have risen more in the past two days' trading: Italy or France?

The answer is France, which has travelled from 3.15% on Wednesday morning to 3.48% Thursday afternoon (as at 6pm). Italy has gone from 6.75% to 6.95%. Of course, that's not the main story of the week, since Italy ended last week at 6.3% and touched 7.5% during Wednesday's drama. Even so, the blow-out in France's spread over Germany – a record in the euro era of 168 basis points – illustrates how the crisis is spreading.

Standard & Poor's, which erroneously dispatched a message on Thursday that France's credit rating had been downgraded, can't take all the blame (though the "technical error" was appalling). The deeper reasons include:

1. French banks are carrying more Italian debt than anybody else – about €300bn worth. That's on top of the writedowns they are currently taking on their large Greek exposures.

2. Within the worsening outlook for eurozone growth published by the European commission on Thursday, France came off badly. Don't expect growth of 2% next year: the new figure is just 0.6%.

3. A credit rating change now seems more likely, even if S&P has fixed its computer. In the tail-wags-dog world of ratings agencies, higher yields tend to make downgrades more likely.

4. There is the worry that any attempt at bailing out Italy would put intense pressure on France. The European financial stability facility is backed by guarantees from member states. Italy obviously couldn't give guarantees on loans to itself, so a greater burden would fall on others. Alternatively, any officially sanctioned "haircut" for holders of Italian debt would rebound on French banks.

Valérie Pécresse, the French budget minister, is entitled to argue that France is "not at all in the same situation" as Italy. The trouble is, in the eyes of some investors, betting against French bonds has suddenly become two bets for the price of one. It's a cheap way to bet against the eurozone finding a painless solution to the Italian muddle; and it's a way to gamble that the latest French austerity package, a mix of tax rises and spending cuts, won't be enough to hit the deficit targets and thus satisfy ratings agencies.




There is also an article from Mish's Global Economic Analysis
France, the new elephant in the room

‘Sarkozi’s head to roll next – probably’

RT

Though France currently boasts an AAA rating and has its debts under reasonable control, domestic issues could knock it off its perch sooner rather than later, argues Hamish McRae, chief economic correspondent of The Independent newspaper.

The expert commentator told RT that a French economic collapse could mean that the next head to roll after Silvio Berlusconi’s might well be that of Nicholas Sarkozy.

In the meantime, Italy could find a way through the crisis if a new and competent government of  technocrats gets the seal of approval from the IMF. But one way or another, it looks like clutching at straws since the new government will have to pass a fresh bailout plan which is necessary to get the latest €8 billion loan.

Since the EU is considering drafting in Chinese financial help, this is a chance for China to play a big global role and stabilize the world’s financial system.

On the other hand, solving the eurozone crisis would serve as a great opportunity for China

“to show Europe that the euro could be finished by Easter.”

The newly-announced plans of France and Germany to create a smaller, more secluded “eurozone” do sound realistic to the economic commentator.

“The big game is to preserve the EU, not to preserve the euro. If the euro has to go – than it is better that it should go,” Hamish McRae argues.