Friday, January 23, 2009

France’s AAA Rating May Be Under Stress as Debt Rises, ING Says



The extra yield investors demand to hold 10-year French bonds instead of the benchmark German bunds widened to 57 basis points on Jan. 21, the most since the euro’s debut a decade ago. The average yield spread in the past 10 years was 8 basis points.

France is no longer a currency issuing nation, meaning that the government can no longer spend by simply crediting bank accounts. If the government needs money it must borrow--either from the savings of its citizens, or those of foreigners. This means the debt is a real problem and must somehow be financed. That is not the case of countries like the U.S. or Japan or Britain or any other sovereign currency issuer that can spend by merely crediting bank accounts. In these cases there is never a risk of a payments crisis, but in France there is. That risk is also present in the other Eurozone members.

2 comments:

Jeff said...

The problem with Britain is that its banks have $4.4 trillion in liabilities denominated in dollars, versus the government's paltry $61 billion in dollar reserves. They should have camera crews out at Kennedy to watch the bales of dollars being loaded on 747s to be shipped overseas. There's no way the U.S. will let Britain default. Same probably goes for any E.U. country, as well.

Mike Norman said...

The Bank of England could buy dollars in forex markets to meet dollar liabilities of domestic institutions. However, that would tank the pound and maybe that is part of what is going on. Our Fed could supply the dollars via swap lines or direct $ loans, which also has been going on as we know.