Bond markets target France

Tim Wallace
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CONFIDENCE in France’s and Spain’s ability to pay back their debts weakened yesterday as investors piled into UK and German government debt.

Yields on 10-year French bonds rose 0.3 percentage points over the day, to 3.47 per cent. Spain’s yields too have risen steadily, hitting 5.95 per cent for 10-year bonds, before falling back to 5.86 per cent at close. It now costs almost twice as much for the French to borrow as the Germans, with the gap between the two hitting record levels and ending the day at 1.7 per cent.

UK yields on 10-year notes, conversely, plummeted to their lowest rate since first being offered in the 1950s, as its safe haven status consolidated.

The French-German spread was worsened when credit rating agency S&P accidentally distributed an e-mail that falsely said it had downgraded France. Angered French authorities have demanded an investigation.

Nonetheless, the rising yield was further confirmation of mounting pressure. The European Commission has cut its Eurozone GDP growth forecasts for 2012 from 1.8 per cent to just 0.5 per cent, and expects “slightly negative GDP growth” over the end of this year.

Commissioner Olli Rehn said the French government must implement further steps to ensure France meets its deficit-cutting targets and maintain its triple-A credit rating.

France’s budget projections are based on one per cent GDP growth in 2012. The Commission believes it will actually be 0.6 per cent. French ministers denied the finances are in trouble.

Meanwhile Italian 10-year yields tumbled from 7.39 per cent on opening to 6.89 per cent at the end of the day, taking the country out of the psychological “danger zone” of seven per cent or more.

Analysts believe the fall was prompted by two factors. First, €5bn (£4.3bn) of one-year treasury bills was successfully sold by the Italian government, albeit at 6.09 per cent – a euro-era high and almost double the 3.57 per cent paid on last month’s similar sale.

Second, ex-commissioner Mario Monti is now lead prime ministerial candidate, after being appointed senator for life by President Napolitano.

Though the timeline is not certain, economists hope Berlusconi may at last pass financial reforms and could be gone before the weekend is out.

Some economists believe Spain is not safe, due to its exposure to potentially bad banks, though it does not have the huge state debts of Italy.

Meanwhile, former central banker Lucas Papademos has been appointed Greek Prime Minister, charged with getting the country through the crisis.