France is coming under growing scrutiny, though we note that the Bloomberg story regarding the potential loss of its AAA rating is based on analyst views, not rating agencies. Note that the rot continues to spread from the periphery to the core, with France 5-year CDS price of 104 bp today near the record high of 107 bp earlier this month while Belgium 5-year CDS price of 213 bp today is a new record high. Even Germany and Netherlands CDS prices have been dragged higher in recent weeks and what’s worrisome is that the core euro zone is coming under pressures as the contagion continues unabated. European officials have yet to find the “game-changer” that turns market sentiment around, and so we see continued spread-widening in euro zone bond markets as well as ongoing EUR weakness. We believe that the “game-changer” remains debt restructuring coupled with aggressive IMF and World Bank-backed structural reforms, a la Latin America under the Brady Plan. See our recent Special FX entitled “Handicapping European End Game Scenarios.” A muddle-through approach is clearly doing nothing to stop the bleeding.
Our sovereign ratings model puts France as a borderline AA+/Aa1/AA+ credit, so there is certainly a risk that France is downgraded from its current AAA/Aaa/AAA ratings in the coming quarters. However, because the slippage is borderline, we do not think there is an obvious case for a downgrade currently for France, which is more than we can say for many others in the euro zone. But recent ratings action in the euro zone underscores the fact that the agencies are on the warpath and unlikely to relent anytime soon and so even France is coming under increased downgrade risk. As we noted earlier this month, euro zone fiscal and budget numbers are going to get worse before they get better and so the downgrade story is likely to remain intact for 2011.
About Win Thin
Win Thin is the Head of Emerging Markets Currency Strategy at Brown Brothers Harriman. He has a broad international background with a special interest in developing markets. Win received his Ph.D. in economics from Columbia University in 1995, specializing in international and development Economics. He received an MA from Georgetown University in 1985 and a B.A. from Brandeis University 1983.
No related posts.
Like us on Facebook
Follow Edward on Twitter
Latest Subscriber Posts
- Economic and market themes: 2014-03-07
- Economic data show Europe on upswing and US growth down
- Back in the US, what are the data telling us?
- More on the Ukraine conflict
- On the Ukrainian conflict
- Economic and market themes: 2014-02-28
- Edward Harrison’s Ten Surprises for 2014, Part 2
- Edward Harrison’s Ten Surprises for 2014, Part 1
- Economic crisis in the post-Bretton Woods age
- Economic and market themes: 2014-02-21
- Some brief thoughts on releveraging and wage growth
- Economic and market themes: 2014-02-14
- Transmission mechanisms from the slowing in China
- Ten Surprises for 2014 coming
- Inventory builds and subpriming of auto market show problems in US
Recent Blog Posts
- Ruble hits new lows as Bank of Russia focuses on more “pressing” issues
- RT Management’s response to media over RT America’s journalism
- Historical realities and 50% profit growth
- The ECB and the Eurozone Credit Crunch
- Will the slowdown in US services sector reverse with warmer weather?
- What is the ECB to Do?
- A Century of Policy Mistakes
- Deflation and the ECB
- Can the rally in global commodities be sustained?
- William White: Central Banking…Not a Science
- Russia and its Dollar Reserves: Going Nowhere Fast
- Another Short History Lesson On Russia and Ukraine
- Will emerging markets come back?
- And the award for EM safe haven of choice goes to …
- The growing mess which will be left behind by the Abenomics experiment
Daily Links Posts
- What do negative interest rates do?
- A Short History Lesson On Ukraine and Crimea
- George Magnus: We should take the emerging markets volatility seriously
- Chart of the day: Dow 1928-1932
- Another Short History Lesson On Russia and Ukraine
- Seven latest developments in Venezuela – a crisis in the making
- What are the differences between QE1, QE2 and QE3?
- Now Is the Time to Buy Gold
- Turmoil in emerging markets: What’s missing from the story?
- Argentina – From Bad to Worse
- ECB Preview: SMP sterilization versus reserve requirement changes
- The move to safe havens may have begun
- Chart of the day: US Manufacturing Employment, 1960-2012
- Scotland and the banks
- The Dummy’s Guide to the US Banking Crisis
- Bitcoin as a deflationary force for bank fees
- Bank reserves and the falling loan to deposit ratio at US banks
- Stephen Roach: US consumers are still in a balance sheet recession
- Walbucks: Bitcoin for Walmart
- The emerging markets crisis is not all about tapering
- Doug Casey: Europe will be the Petting Zoo of the Chinese | Web Extra
-  Jim Rickards on dollar debasement & Peter Joseph explains the Zeitgeist Movement
-  James Turk: Gold I$ money, and Ukraine's fiscal woes
-  Money laundering & Bitcoin, Macroeconomics with Axel Merk
-  Insolvency Crisis in Ukraine & Cullen Roche: US is "muddling through"
-  Paul Craig Roberts on the US economy and paper versus physical gold
-  Jim Rogers: The serious problems in emerging markets 'are going to get worse'
-  Max Keiser on crypto-currencies & Dean Baker on aggregate demand
- Shrinkflation: Pippa Malmgren explains how to look for hidden rise in prices | Web Extra
-  Minter Talks Trash & Best of with Jim Rickards, Cullen Roche, and James Turk