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Monday, October 17, 2011 10:12 PM

France Risks AAA Rating on EFSF Leverage; Spotlight on Portugal, the Next to Fail

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The spread between German and French government bonds keeps rising. It is now at a record 95 basis points and counting (a bit higher than the article below suggests).

Look for the spread to widen further because France Risks AAA on Bulked Up ESFS Bailout Fund

Proposals to beef up Europe’s bailout fund by offering to guarantee portions of the debt owed by the region’s weaker governments threaten to trash France’s top credit rating.

France’s rating is under pressure, Moody’s Investors Service said yesterday, and investors now demand to be paid a record 93.2 basis points more to hold its bonds rather than German notes, up from 29 basis points in April.

The cost of insuring French bonds using credit-default swaps has soared to 183 basis points, from an average of about 84 in the first half of the year. They are the most expensive to protect among the top-rated nations in Europe and more costly than for nations rated AA- by Standard & Poor’s, including China, Estonia and the Czech Republic.

“Looking at the numbers, France is no longer a AAA credit,” said Nicola Marinelli, who oversees $153 million in funds at Glendevon King Asset Management in London. “They’re talking about guaranteeing trillions of euros of bonds but if France isn’t a AAA then even guaranteeing one more euro might not be sustainable.”

‘Political Signal’

Italy and Spain alone must refinance more than 420 billion euros of bonds that come due next year, data according to Bloomberg show. By offering to take the first loss on some portion -- the part mooted is 20 percent -- of new issuance, the euro-region states can show they are standing behind the issuer and persuade private investors to step in.

“You’re sending a very strong political signal that all the member states believe that Spain and Italy are solvent and they are willing to demonstrate that by putting themselves in harm’s way,” said Kapoor at Re-Define. “They have a very narrow space for maneuver in terms of the leverage. They’re between the devil and the deep blue sea.”

French banks tumbled in the past three days with BNP Paribas (BNP) SA, the biggest of the nation’s lenders, dropping more than 12 percent and Societe Generale (GLE) SA down almost 14 percent on concern they would be downgraded along with the government.

“Given the sheer size the French banking system it may end up being singled out as the most vulnerable country to a rating agency downgrade,” said Marchel Alexandrovich, an economist at Jefferies International in London.
Political Signal or Political Stupidity?

Spain is not solvent. Nor is Portugal.

The odds of no haircuts on Spanish and Portuguese debt are near-zero. As with Greek bonds approximately six months ago, no haircuts are priced in on both countries.

Now 50% minimum haircuts on Greek bonds are openly talked about. In a year or so, perhaps way less, there will be talk of haircuts on Portugal, then Spain.

Spotlight on Portugal, the Next to Fail

Portugal is about ready to blow and the EU clowns are still attempting to contain Greece. That foolish attempt at containing Greece, now has the AAA rating of France at stake.

Treasury Secretary Tim Geithner thinks this can be solved with leverage. Yet, that leverage is going to cost France its AAA rating, and deservedly so.

Mike "Mish" Shedlock
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