France’s AAA Rating Is Doomed

11/30/2011 6:30 am EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

That is the view of MoneyShow’s Senior Markets Editor Jim Jubak, and he explains what impact the credit-rating downgrade may have on the financial markets.

OK, so France still has its AAA rating, its credit rating from S&P and Moody’s and Fitch. But the markets right now are saying that that rating is doomed, that France is going to get downgraded sooner rather than later, and you can see it in the rates that people are demanding before they buy French bonds.

Basically the yield on the French ten-year is up near 3.5%, 3.6%, 3.7%, which doesn’t sound like a whole lot in comparison to the Spanish yield, but if you look at where it sort of falls in the scheme of things, it’s halfway in between a true AAA rating and the yield that those countries pay, and somebody like Belgium.

The ten-year Belgian yield is now up to 5%. Belgium is not AAA-rated anymore.

The UK, which is also AAA like France, theoretically should be trading roughly in lockstep. After all, the United Kingdom has a very big budget deficit, more than 8% of GDP, so it shouldn’t be trading really, really well.

But the yield spread between the UK bonds and the French bonds has gotten up to a whole percentage point—in other words, UK bonds are paying less because people trust them more.

All this is a sign that people are getting ready. At some point the bond markets are saying France is going to get downgraded, "We’re not going to be able to put our trust in that, there are just too many obligations out there, and the French don’t have enough firepower to deal with it."

When that happens, there are big consequences for all of Europe. The European Financial Stability Facility is supposed to backstop Italy and Spain and other countries if it ever gets its act together.

Well, if France goes, it won’t really matter when they write the regulations for this—the facility won’t have the money and the guarantees to go into action. So if France falls, pretty much all the plans that the European leaders put together in July and October go out the window, and it’s back to ground zero.

This is a big deal if France goes, as I say we’re back to ground zero, the crisis moves up another step, gets another notch more serious, and so another thing to watch right now is where French yields are going, that’s on the ten-year French bond.

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