French-German yield spread.

[Beet]

Up 9.4% today.

This is why my plan has France with the PIIGS.

If the crisis hits France, Mr Hollande may find himself the next Mr Papandreou-- perversely forced to bust the French unions as Mr Papandreou has tried to bust the Greek unions-- or will France simply choose to exit the euro at that point?

[Wonkish1]

Up 9.4% today.

This is why my plan has France with the PIIGS.

If the crisis hits France, Mr Hollande may find himself the next Mr Papandreou-- perversely forced to bust the French unions as Mr Papandreou has tried to bust the Greek unions-- or will France simply choose to exit the euro at that point?

Agreed!

If the crisis is actually far enough off for that it doesn't occur until Hollande is elected, then he'll  end up passing draconian tax increases first. That will result in many businesses leaving and economy tanking just like in Greece. Then he'll be forced into significantly cutting spending, but not nearly as bad as the other PIIIGS.

I don't think France will be one of the primary instigators for wanting to exit the Euro. If the Euro breaks up(which I think is just a matter of time) it will be because of Germany, Greece, or both. I also think that France will be able to avoid any risks of having to do restructuring--they are in a better position than the rest of the PIIIGS.

[Beet]

Up again today to a new record, 96 bp. My prediction is that this indicator will continue to trend upward for the next several months, so there is a profit to be make in a "long" swap.

[Beet]

Surged to 112 basis points.

[Beet]

Up by 3 bps again to a record 115 bps.

To give an idea of how dramatic the past few days have been, the total spread before the financial crisis (2007) was 5 bps. So today's 3 bps rise alone is like a 60% surge in one day, compared to the pre-financial crisis difference between the two countries' rates.

[Yelnoc]

Could somebody explain what drives sovereign bond yields up and down?  I understand how buying and selling works of course, but I don't understand what the traders are basing their decisions on, and thus, what the yields really mean.

[Gustaf]

Could somebody explain what drives sovereign bond yields up and down?  I understand how buying and selling works of course, but I don't understand what the traders are basing their decisions on, and thus, what the yields really mean.

They typically reflect the expectations on other investments and on inflation (so, basically, how interest rates will move). In the current case (between the states of the eurozone) they pretty much have to reflect different expectations on default.

[opebo]

Actually the central bank of a country can set the yield on their bonds by purchasing (or selling) bonds.  Apparently, however, there is no longer any independent 'Banque de France' which is why their yields are out of control.  Or, another way of putting this - France's problem is it can't print Euroeos.

[phk]

[Beet]

After a volatile two days, the spread settled down 1bps to 114 bps.

Meanwhile, Spanish and Italian yields continue to rise as the ECB scales back its bond buying program. The ECB strategy seems to be to engineer an 'orderly' rise in interest rates for Spain and Italy. But it's not clear if there's any ceiling?

[Beet]

Surged by six points to a new record 120 bps.

[Politico]

The only government bonds worth a damn are American, Canadian and Australian ones. If the $hit really hits the fan, and I am talking about American military might needing to step up to ensure American stability coupled with the end of the global economy as we know it, only these three are truly safe.

[opebo]

But there is no danger if the bonds can be sold the the central bank instead of to 'private investors'.  The ECB should simply buy French, Italian, Spanish, and Greek bonds till there is no 'spread'.

[Beet]

Plunged 8 bps to 112 bps.

[Beet]

Plunged 9 bps to 103 bps.

[Јas]

FYI Beet, you're entering JJ territory with these updates.

Also, I don't think single digit CDS bps changes are so significant as to earn the verbs 'surged' or 'plunged'.

[Beet]

You must be logged in to read this quote.

Actually, 8-9 bps moves on an indicator like this is pretty huge (another one today btw). Look at the volatility history of this spread. It really isn't supposed to move much at all. The last week has been one of the most volatile in its history.
...
The problem with not updating these threads daily when there's a 'big' move is that it tends to fall off the radar screen. People forget about it while the credit markets continue to deteriorate. And then one day they wake up and there's a big problem. Part of the reason I made this thread is to highlight a relatively obscure indicator and keep awareness raised.

Some people here think I am all about 'fear' but in reality I believe at this point fear is a good thing. Not the markets necessarily but the authorities and the world of politics. These people should be afraid because the discontent against them is growing and the problems they face are underrappreciated. The more fear there is, the more chance there is that the authorities will take decisive action and more importantly, keep up the pressure.

The less fear there is, the more likely they are to think they can get away with kicking the can down the road when things will somehow magically improve (or propose half-asses policies that are not fully thought through). What I'm trying to say is that there's no reason to believe that if the credit markets are not showing it.

[Beet]

The French-German spread is back up to 109 basis points.

(According to This Time is Different by Ken Rogoff and Carmen Reinhardt, France has not defaulted since 1812)

[Marston]

Forgive my naivety, but what would be the short-term consequences of a French default on the world economy? Would it be able to be contained?   

[Gustaf]

Forgive my naivety, but what would be the short-term consequences of a French default on the world economy? Would it be able to be contained?   

http://www.youtube.com/watch?v=_eyFiClAzq8

[Wonkish1]

Forgive my naivety, but what would be the short-term consequences of a French default on the world economy? Would it be able to be contained?  

It would really suck, but its not the end of the world!

The world has suffered similar big sovereign restructurings in the past.

If by contained you mean can it avoid a financial Armageddon? Absolutely. If by contained you mean will it be prevented from causing significant losses and slowdowns outside of France or even the EU? Absolutely not.


But ultimately its going to be Japan's default that will happen that is going to hurt the most not France's which I'm not convinced will happen.

[Gustaf]

Forgive my naivety, but what would be the short-term consequences of a French default on the world economy? Would it be able to be contained?  

It would really suck, but its not the end of the world!

The world has suffered similar big sovereign restructurings in the past.

If by contained you mean can it avoid a financial Armageddon? Absolutely. If by contained you mean will it be prevented from causing significant losses and slowdowns outside of France or even the EU? Absolutely not.


But ultimately its going to be Japan's default that will happen that is going to hurt the most not France's which I'm not convinced will happen.

I suspect that if France were to actually go the proverbial fan would be hit by the proverbial sh*t. I still think there are decent odds of it not becoming that bad though.

[Beet]

Ironically a French default could actually help the US as I suspect a lot of capital would flood into here.

[Wonkish1]

Ironically a French default could actually help the US as I suspect a lot of capital would flood into here.

Even a Portuguese default will cause huge flooding of money to the US.


France effectively declared bankruptcy after the American Revolution and it sparked the French Revolution. But all be damned if 15 years later the French people didn't have better standards of living than they did before the effective bankruptcy.

Things got really, really, really bad for the Argentinian people when their government was forced to restructure. Still fast forward several years and the Argentinians were pretty close to the standard of living they had before.

The Russians defaulted in 1998 and many people were at risk in that country of freezing to death that winter. Fast forward a few years and you can take warmth, food, etc. off the list of things that worry average Russians.

In each case the defaults always hurt the countries own people more than they do the rest of the world because that is where the exposure is most concentrated(even today of well diversified risk). But that doesn't mean that a return to normalcy a few years after the default is out of the picture.

[Gustaf]

A large inflow of capital into the US might not necessarily be a good thing, since it would drive up the dollar again.