So Is It Going To Be France Next To Go Bust After Greece?
SO. Is France alls et to follow Greece? Well, no, obviously it’s not going to be France going bust next: we’ve Spain Italy and Portugal to get through first. But the markets are moving to the point where France might well start to look like it’s in trouble.
Yields on French 10-year government bonds just exploded, now up over 6% on the day to 3.14%.
The spread between French 10-year bonds and German bunds is up even more dramatically — more than 10 bps or a full 9% on the day.
You need another little bit of information to understand this:
Casualty of “market conditions” on Wednesday – the EFSF’s latest bond issue.
The EFSF had mandated Barclays Capital, Credit Agricole and JP Morgan on Monday to price off a ‘no-grow’ €3bn 10 year deal to finance Ireland’s next bailout loan tranche, due in November.
Yeah, I know, it’s all still gibberish.
So here it is again in plain language. There’s something called the EFSF (don’t ask) which is meant to help Ireland, Greece and Portugal pay their debts. The EFSF goes out and borrows the money in the markets, turns around and lends it to those countries. Now, because the EFSF is backed by France and Germany and Finland and Belgium and…..it can borrow at lower interest rates than Greece, Ireland or Portugal.
Think of it as the Bank of Mum and Dad guaranteeing your credit card.
Which is great. But what happens when Mum loses her job and Dad’s not getting any overtime? Their guarantee of your debts isn’t really all that valuable, is it?
Now we’re not seeing that just yet: but we are seeing people beginning to think that it might be possible. France doesn’t look so bad….but if we add the guarantees to Portugal etc, then maybe the ones they might have to give to Spain and Italy….well, France’s guarantee just isn’t all that useful.
So, the EFSF has had to pull (um “delay” officially) a bond issue because no one wanted to buy it at the price they wanted to sell at. And France is having to pay ever more for any new money it borrows because, well, do they have enough money to stand by all the guarantees they’ve made?
It’s not quite time to stockpile shotguns and baked beans in the cellar yet. But it is getting mighty interesting.