A few days ago, France was paying close to 0.6% to borrow money for 2 years.
German 2-year yields are already slightly negative, and at this rate, French borrowing costs will be negative soon.
On the surface, this is a bit of a head-scratcher, given the widespread view that new President Francois Hollande is a spend-happy socialist who is doubling down on bad historical fiscal practices.
But the reality is, when it comes to these countries, is that fiscal soundness is much more about perception than reality. After all, Spain has put forth a decent effort on reforms so far. And Italy’s deficit isn’t that huge (though it’s debt is). Nothing that either country is doing is saving them from the sovereign debt collapse vortex.
At this point, the market is rendering a judgment on the Eurozone itself, and it’s figuring out who’s really in the club of those who are too big to fail and who isn’t. For now the market believes that France is in the club with Germany, of countries who absolutely are too big to fail, and would be saved to the penny come hell or high water. The market is not convinced of that with respect to Spain or Italy, and that’s why you have the divergence.
- Spain Borrowing Rate Hits Danger Zone (abcnews.go.com)
- Debt crisis: live (telegraph.co.uk)
- Spain borrowing rate hits bailout danger zone (news.yahoo.com)