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09-27-2011, 02:20 AM
In the euro zone, only Germany, the Netherlands and Finland pay less than France. Germany pays 1.7 percent to borrow for 10 years, while the U.K. pays 2.4 percent. The Netherlands, the third-biggest of the euro area countries with AAA ratings behind France and Germany, pays 2.2 percent.
France set out to issue about 180 billion euros ($242 billion) of bonds in 2011. The government’s debt management office will update investors on its plans for bond sales in the rest of the year and 2012 tomorrow, when the finance ministry tables its budget law for the coming year.
France has only 9 percent of its 2011 bond issuance outstanding, according to Credit Suisse Group AG, compared with 26 percent of a 226 billion-euro plan for Italy and 30 percent of an estimated 93.8 billion euros Spain is still to auction.
At 1.6 trillion euros, France’s debt outstanding will be about 85 percent of its gross domestic product by year end, according to the International Monetary Fund. That compares with 120.6 percent for Italy and 98.3 percent for the U.S.
Credit-Default Swaps
The specter of a default has boosted Greece’s 10-year yields to more than 23 percent. Borrowing costs for Italy and Spain have risen on default worries and credit rating cuts, with their 10-year bond yields at 5.6 percent and 5.17 percent respectively.
Standard & Poor’s cited political concern for cutting Italian credit ratings to A from A+ with a negative outlook on Sept. 20.
The extra yield investors demand to hold Spanish 10-year bonds instead of similar-maturity German bunds, the region’s benchmark government securities, widened to 418 basis points on Aug. 5, the most since the euro was introduced in 1999. The Italian-German spread hit a record 416 basis points that day.
While French yields remain low, the yield spread with Germany has widened to as much as 88 basis points this year from about 28 basis points in April. Also, the premium demanded for insuring French debt has been rising, with credit-default swaps on government borrowings at a record.
Concerns about the economic risks that its membership of the euro zone creates for France, especially in its banking system, linger.
Investor Shift
At the end of March, French lenders had $671.7 billion in government and private debt in Greece, Portugal, Ireland, Italy and Spain, according to Basel, Switzerland-based Bank for International Settlements.
That’s the biggest exposure to the euro area’s troubled countries and almost a third more than that of German banks. France’s four largest banks have 5.9 trillion euros in total assets, including loans and bond holdings, or about three times France’s gross domestic product.
“The French bond market remains vulnerable to a shift in investor sentiment,” said Olivier Bizimana, an economist at Morgan Stanley in London. “The sovereign debt crisis in the euro zone has escalated” and concern about contagion to France has increased, he said.
For now, consensus across the French political spectrum on the need to shrink the deficit distinguishes it from countries such as Greece.
Political Consensus
In Greece, government efforts to impose austerity have met with objections from opposition parties and strikes, while in the U.S. the government faced possible shutdown this year as lawmakers haggled over tax and spending.
In contrast, France’s main opposition Socialists have said they’ll honor the deficit-reduction pledge made by President Nicolas Sarkozy if they win next year’s general election.
Sarkozy has promised to slash the budget deficit to 5.7 percent of GDP this year, 4.5 percent next year and 3 percent in 2013. Last month he announced an additional 12 billion euros of measures to trim the deficit. France’s low borrowing costs make more drastic budget cuts less imperative, especially ahead of the presidential elections in May next year.
Also unlike Greece, France has no trouble collecting taxes. French tax receipts increased to 160.6 billion euros in the first seven months of this year from 159.7 billion euros last year and 133.8 billion euros in the same period in 2009 even as economic growth fell short of government forecasts. The government collects more than 49 percent of GDP in tax and pays 12 percent of the state budget in interest charges.
Consistent View
“If the growth is there, the tax revenue is there,” Societe Generale’s Martinez said. “The problem of France is one of political will but once the political choice is made, the machine is very powerful. Just ask a small business: there are very few that will take the risk of trying to cheat the taxman. The tax inspectors are feared and investors sense this.”
The three major credit-rating companies have confirmed France’s top AAA rating in recent months.
“The market has a very consistent view of the credit risks’ for the French government,” said Christoph Kind, the head of asset allocation in Frankfurt at Frankfurt Trust.
http://www.businessweek.com/news/2011-09-26/france-s-pre-louis-xiv-government-system-helps-cap-debt-costs.html
France set out to issue about 180 billion euros ($242 billion) of bonds in 2011. The government’s debt management office will update investors on its plans for bond sales in the rest of the year and 2012 tomorrow, when the finance ministry tables its budget law for the coming year.
France has only 9 percent of its 2011 bond issuance outstanding, according to Credit Suisse Group AG, compared with 26 percent of a 226 billion-euro plan for Italy and 30 percent of an estimated 93.8 billion euros Spain is still to auction.
At 1.6 trillion euros, France’s debt outstanding will be about 85 percent of its gross domestic product by year end, according to the International Monetary Fund. That compares with 120.6 percent for Italy and 98.3 percent for the U.S.
Credit-Default Swaps
The specter of a default has boosted Greece’s 10-year yields to more than 23 percent. Borrowing costs for Italy and Spain have risen on default worries and credit rating cuts, with their 10-year bond yields at 5.6 percent and 5.17 percent respectively.
Standard & Poor’s cited political concern for cutting Italian credit ratings to A from A+ with a negative outlook on Sept. 20.
The extra yield investors demand to hold Spanish 10-year bonds instead of similar-maturity German bunds, the region’s benchmark government securities, widened to 418 basis points on Aug. 5, the most since the euro was introduced in 1999. The Italian-German spread hit a record 416 basis points that day.
While French yields remain low, the yield spread with Germany has widened to as much as 88 basis points this year from about 28 basis points in April. Also, the premium demanded for insuring French debt has been rising, with credit-default swaps on government borrowings at a record.
Concerns about the economic risks that its membership of the euro zone creates for France, especially in its banking system, linger.
Investor Shift
At the end of March, French lenders had $671.7 billion in government and private debt in Greece, Portugal, Ireland, Italy and Spain, according to Basel, Switzerland-based Bank for International Settlements.
That’s the biggest exposure to the euro area’s troubled countries and almost a third more than that of German banks. France’s four largest banks have 5.9 trillion euros in total assets, including loans and bond holdings, or about three times France’s gross domestic product.
“The French bond market remains vulnerable to a shift in investor sentiment,” said Olivier Bizimana, an economist at Morgan Stanley in London. “The sovereign debt crisis in the euro zone has escalated” and concern about contagion to France has increased, he said.
For now, consensus across the French political spectrum on the need to shrink the deficit distinguishes it from countries such as Greece.
Political Consensus
In Greece, government efforts to impose austerity have met with objections from opposition parties and strikes, while in the U.S. the government faced possible shutdown this year as lawmakers haggled over tax and spending.
In contrast, France’s main opposition Socialists have said they’ll honor the deficit-reduction pledge made by President Nicolas Sarkozy if they win next year’s general election.
Sarkozy has promised to slash the budget deficit to 5.7 percent of GDP this year, 4.5 percent next year and 3 percent in 2013. Last month he announced an additional 12 billion euros of measures to trim the deficit. France’s low borrowing costs make more drastic budget cuts less imperative, especially ahead of the presidential elections in May next year.
Also unlike Greece, France has no trouble collecting taxes. French tax receipts increased to 160.6 billion euros in the first seven months of this year from 159.7 billion euros last year and 133.8 billion euros in the same period in 2009 even as economic growth fell short of government forecasts. The government collects more than 49 percent of GDP in tax and pays 12 percent of the state budget in interest charges.
Consistent View
“If the growth is there, the tax revenue is there,” Societe Generale’s Martinez said. “The problem of France is one of political will but once the political choice is made, the machine is very powerful. Just ask a small business: there are very few that will take the risk of trying to cheat the taxman. The tax inspectors are feared and investors sense this.”
The three major credit-rating companies have confirmed France’s top AAA rating in recent months.
“The market has a very consistent view of the credit risks’ for the French government,” said Christoph Kind, the head of asset allocation in Frankfurt at Frankfurt Trust.
http://www.businessweek.com/news/2011-09-26/france-s-pre-louis-xiv-government-system-helps-cap-debt-costs.html