Chillin' out till it needs to be funded
Ok, you know America’s being ahead in consumption is not related to the consumer credit offtake this time and the Fed Reserves aren’t helping any QE3, but they are still signs that the US has a healthy economy – the cash in corporate balance sheets and the spending in stores and on cars (even at a lowly 12 mln 4 wheelers a year) What is not healthy however that after a merciless beating down of the Swissie, the Yen and some Aussie, those currencies are still at 73 cents, 77 cents and 103 cents respectively near their all time records just from 6 months ago in 2 of the 3 cases.
However, there is a mixed silver lining as French CDS’ as reported on Bloomberg flew to lifetime highs closely tracked by its banks who among the Top 3 may be holding more than $100 bln French debt each, at least a $100 bln of which is long term.
With French gearing going from 80-90% of the GDP to 116% of the GDP the deficit cuts stifling growth and the usual tales of fiscal wickedness, it is unlikely that France will be able to pay its social security bills and S&P may have to head for the Default charts, note the significant breaks and trundle down the Western European Independent into submission, much like NATO leadership has been marginalising it in defense and its citizens, in more spheres like Sport and Workplace debates. (SocGen promptly fell 20% on the news, S&P reaffirmed its France rating was stable and the country itself admitted it was relying on a 2% GDP growth where it is likely to grow by just 0.3% as of theis Friday)
WHY FRANCE IS NOT THE USA
The French deficit hit a high of 7.5% of the GDP last year and is planned to cut down to 3% by 2013 and 4.6% next year even as new Finance Minister Francois Baroin and Budget minister Valerie Pecresse try to steady the markets over the US downgrade fracas. French downgrades will translate into quicker increases in borrowing costs for the nation as its currency, the Euro is not as widely held as the Diollar and is also governed on the positive side more by growing economies like Germany and peripherals like Italy and Spain. Its $1.3 trillion debt and shrinking GDP will mean the Debt to GDP ratio will also rise next year with just Federal debt at 87% of the GDP according ot the Government’s own estimates
US debt costs have in fact lowered at a fast pace since the downgrade , markets counting its cash and declaring the currency a safe haven. Also US’s worries would be more like Japans with low interest rates hounding it unless recovery happens while a FRench downgrade will quickly hike interest costs for Sarkozy’s government by upto $23 bln every year.
Friday’s GDP data in France is likely to show a down tick to 0.3% and likely contraction as deficit reduction picks up pace from the current 7% to 5% and below A Fench CDS and 10Y yield is likely to shoot to 300 bps and 250 bps inching towards the Spanish 575 bps and 500 bps scores. A GDP growth of less than the target 2% would hit deficit reduction plans and raise the debt ratio higher towards a probable downgrade. The morning CDS score at 163 bps and the yield diff between 10Y and 30Y debt higher to 141 bps squarely puts the sovereign on the verge of default but way behind the peripherals, its entire debt burden can now be insured for just $31 bln in the coming week at today’s rate as it tries a new calendar for debt reduction this week. However current buyers of/writers of French insurance would end up paying thrice the amount in two weeks if they do make the purchase now and spreads widen to 500 bps levels, notionals reducing at exponential rates on the insurance