France starts to show the early symptoms of the Greek disease

11/10/2011 6:27 pm EST


Jim Jubak

Founder and Editor,

I wouldn’t say that France has caught a full-fledged cold yet from neighboring Italy. But it is developing sniffles.

The problem is one that we should be familiar with from Greece and Italy. No sooner does a government—in this case that of President Nicolas Sarkozy—put an austerity package in place in order to reduce the budget deficit than falling economic growth blows a hole in that budget and creates the need for another austerity package.

Today it’s the European Commission that has issued a new and lower projection for economic growth in 2012. France will grow by just 0.6% in 2012—and that’s before taking into account the new austerity package recently proposed by Sarkozy.

Sarkozy proposed a new package, aimed to reduce the budget deficit by 6 billion to 8 billion euros ($8 to $11 billion), after his government reduced its forecast for French economic growth to 1% in October. The government’s earlier forecast had called for 1.75% growth in 2012. The goal is to produce a balanced budget by 2016.

You can see the problem, right?

Yields on French government 10-year bonds have a long way to go before they hit Italy territory near or above 7%. But they sure moved in the wrong direction today. The yield on the 10-year French bond climbed 0.2 percentage points to 3.4% at the close in London trading. The spread between the yield on the French 10-year bond and the benchmark German 10-year bond rose 0.18 percentage points to 1.66 percentage points. That’s the widest spread since the beginning of the euro in 1999. (For comparison, the 10-year Treasury from the AA-rated United States yields 2.07%.)

The European Commission predicts that France’s debt burden will climb to almost 92% percent of GDP in 2013. This morning Standard & Poor’s reaffirmed its AAA rating for France with a stable outlook. And the French government extended a ban on short-selling 10 French financial stocks for another three months.

There’s clearly still a lot that needs to get sorted out.

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