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Bonds: Downgrade rumours bearing down on France

Date: Friday 13 Jan 2012

Bonds: Downgrade rumours bearing down on France

The yields on the benchmark 10 year bonds of the distressed euro area countries went up on Friday as expectations grew of several sovereign downgrades:

Italy: 6.64% (+14bp)
Spain: 5.21% (+8bp)
France: 3.1% (+6bp)
Germany: 1.77% (-7bp)
UK: 1.97% (-5bp)
US: 1.85% (- 8bp)

France is the country receiving the most attention from investors. As well, sourced media reports suggest the country is about to lose its AAA debt rating with the Standard and Poor’s agency.

Some are asking aloud whether this might undermine the Eurozone’s collective bailout fund, the European Financial Stability Fund, or EFSF, of which France is a major backer.

There has been growing expectation for several weeks, however, that France would lose its AAA status; so the big question will be the number of notches Standard and Poor’s cuts France by finally.

Most reports agree that Germany’s rating will remain unchanged, as will that of the Netherlands and Finland.

In other news, the Financial Times is reporting talks between Greece and its creditors over a final settlement on the country’s debts have broken down.

The International Institute for Finance and BNP Paribas are the two lead negotiators on the creditors' side. They say both parties are “pausing for reflection.” Greece needs to refinance €14bn in March according the FT.

German media have carried reports that European bank stress tests are being put off this year to give financial institutions enough time to raise more capital.

On the markets this morning Italy managed to sell €4.75bn worth of bonds. Most of those were for three years, at an average yield of 4.83%, versus 5.62% at an equivalent auction in December.

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