You are here: Markets » Core Euro Zone Coming Under Increased Scrutiny
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
- The Greece debt bailout negotiations are really about France, not Greece
- Did lending by foreign banks really cause the Greek debt crisis?
- The coming Greek bank nationalization, bail-in and privatization
- Variable geometry bites back: Schäuble’s motives
- The new European Union
- More on Greek Tax Anticipation Note IOUs
- A Return to Fundamentals?
- Greek default
- The Euro is a failure
- Some thoughts on the coming defaults of Greece
- Greek default and Grexit now increasing in probability
- Morality in the Greek Crisis
- Grexit: The staggering cost of central bank dependence
- This is the Framework of a Potential Greek Compromise Taking Shape
- Yanis Varoufakis: Greece, Germany and the Eurozone – Keynote at the Hans-Böckler-Stiftung, Berlin, 8 June 2015
- Are bond investors crying wolf?
- Internal and external balance of savings and investment
- Trends and prospects for private-sector deleveraging in advanced economies
- How do you say “dead cat” in Latvian?
- Property, inequality and financial crises
-  Russian sanctions deepen
- EXCLUSIVE: “Syria has gone backwards 40 years” – UN Envoy to Syria
- NSA allegedly spies on Japan
- Why won’t millennials get out of the house?
- Microsoft offers Windows 10 free of charge
-  Bernie Sanders’ Greece panel, Howard Lindzon on markets and technology
- Twitter shares drop, Samsung stock sours
- Greece is to the Eurozone as Puerto Rico is to the U.S.
- China suspected in United Airlines breach and sniper rifles hacked
-  Galbraith on Varoufakis ‘Plan B’, DiMartino on the Fed’s dilemma