How Much Debt Can France Handle?

10/26/2011 6:30 am EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

Though the economies of Greece and Portugal are quite small, MoneyShow’s Jim Jubak says it’s France that everyone should be worried about, and he explains why.

It’s been possible to pass off the Euro debt crisis as a problem in countries that don’t matter.

I mean, you know Greece—a tiny little peripheral economy in the south of Europe, not very competitive. Portugal and Ireland…we started to worry about Spain and Italy, but they’re still, well, they’re off to the sides, they’re peripheral.

Well, the crisis has started to move toward France, and I think that’s going to make all the difference in the world. On October 19, Moody’s came out and said "Hey, you know, we’re thinking about putting France—which has a AAA credit rating—we’re thinking about putting them on negative watch, moving them from stable to negative."

What Moody’s said was, well, look what’s going on. You’ve got a country that’s running, in 2011, about an 8%, 8.5% budget deficit. They promised to bring it down to 3%, but with the French economy slowing along with the rest of Europe, it seems like that’s not going to make it.

The other thing Moody’s said is, look at all the guarantees this government has made. The government of France is on the line for about $215 billion to the European Financial Stability Facility, always love to count off those words. It’s the body that’s supposed to guarantee that the Euro isn’t going to collapse under the weight of all these countries perhaps going to default.

The French share is about $215 billon, but they’ve also started to issue guarantees to individual banks, so a guarantee to Dexia (DXBGF), which is a French/Belgian bank, and with negotiations going on right now for perhaps increasing the size of the European Financial Stability Facility from its current $600 billion to maybe $1.4 trillion or more, Moody’s is saying hey, how much can the French economy support?

This is, after all, a guarantee that amounts to about 8% or 9% of French GDP. It’s a guarantee they might not need, but France is looking really, really stressed.

Add in the fact that French banks have been really reluctant to write down the value of their sovereign debt. They’re really holding to the line on that Greek debt, the deal is that Greek debt is only going to be written down 21%. So the fact that the market has already marked it down 50% is irrelevant.

These banks look like they’re going to be the ones that need the most capital. Germany is trying to press France to say the capital is initially going to come from the French government, as opposed to some European organization. So you can see all these things sort of piling up on the French doorstep.

The difference there is that France and Germany are really the core. They’re the initiators of the European Union historically, they’re the core of the union. When the problems come to France, I think you’re talking about a different level of concern, a different level of energy, a different level of interest.

This problem has got to be headed off, but you can’t say, "Oh, it’s just those lazy Greeks who spent money they didn’t have." No, this is the whole kaboodle right here, and when it comes to France, I think this is the reason why there is going to be some kind of deal that will finally get this crisis under control.

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