From Credit Writedowns:
The French premium over Germany rose today to a three-month high. Rumors of a rating downgrade proved wide of the mark, but it reflects the market’s anxiety about the outlook for France going forward.
As we have argued, the challenges of the euro zone are not limited to the old periphery of Greece, Ireland and Portugal. Clearly, Spain and Italy are problematic, albeit to varying degrees. Yet the contagion is reaching deeper into the core and this is evident not only in France but also the Netherlands, where Fitch issued cautionary remarks yesterday, warning that it could lose its coveted triple A status.
The choice confronting French voters is not as the partisans would have it as a choice between the status quo and change. Even the re-election of Sarkozy does not mean continuity. The key fact that the French political elite have to come to grips with is the divergence between France and Germany.
Although we can focus on the relative macro performances and the relative strength of the banks, an issue that capture the divergence is China. China will likely replace France as Germany’s largest trading partner this year. Germany has an estimated 5-times more businesses operating in China than France does.
In a word, France has different interests than Germany. Germany wants less ECB and France–both the campaigning Sarkozy and Hollande want more ECB. Sarkozy and Hollande, like Germany’s SPD, appear considerable more sympathetic to a joint bonds. Sarkozy and Hollande seem to see benefits of a weaker euro, while the euro is already weaker than Germany would prefer....MORE