It may be a smaller bazooka but France and Germany seem near to loading up the gun in the euro debt crisis

10/19/2011 12:30 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The denials came down like a monsoon as soon as the Guardian story reporting a deal between Germany and France to increase the firepower of the European Financial Stability Facility crossed the Internet.

But the details of the denial from German Finance Minister Wolfgang Schaeuble make it clear that something is in the works.

The major difference from what the Guardian reported on the French-German talks, it seems from what Schaeuble told German lawmakers, is the size of the weapon that the EuroZone will point at the euro debt crisis. The Guardian’s story had France and Germany loading up a bazooka with $2.8 trillion in potential rescue funding. Schaeuble said that the amount is, instead, a maximum of $1.4 trillion. Certainly a smaller bazooka but still a significant step up from the $600 billion that the European Financial Stability Facility will have at its disposal under current agreements whenever EuroZone bureaucrats get finished writing the rules for the facility.

Exactly how to achieve this increase in firepower may be the sticking point in talks more than the size of the facility. The formula is likely to involve some combination of larger contributions from the 17 EuroZone countries and some mechanism for leveraging those contributions through the kind of debt vehicle recently proposed by Brazil and China for the International Monetary Fund.

France’s major objective in the talks—besides coming up with a plan grand enough to reassure financial markets that the EuroZone won’t let the crisis engulf Italy and Spain—is to protect its own credit rating. Today Moody’s Investors Service warned that it could lower the outlook on France’s AAA credit rating to negative from stable if France didn’t 1) succeed in reducing its 2011 budget deficit from 5.7% to 3% in 2013, and 2) limit any future increase in the financial guarantees that it has committed to the crisis. According to Moody’s France has already committed $217 billion in guarantees to the European Financial Stability Facility. That’s equal to 8.5% of French GDP. France has also recently extended more guarantees to the French-Belgium bank Dexia.

Moody’s isn’t the only source of pressure on France. The bond market has been punishing French debt with the spread on 10-year French government debt climbing to 1.12 percentage points over benchmark German 10-yer debt. That’s the biggest premium since 1992.

 

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