France

To anyone who doubted that the gloves are now fully off between France and Britain, we bring you exhibit A: Speaking in an interview with local newspaper Le Telegramme de Brest to be published later on Thursday, Bank of France head and ECB member Christian Noyer said that a downgrade of France's AAA credit rating would not be justified and ratings agencies are making decisions based more on politics than economics and questioned whether the use of ratings agencies to guide investors was still valid. "In the arguments they (ratings agencies) present, there are more political arguments than economic ones," said Noyer, the head of the Bank of France and a member of the ECB's governing council. "The downgrade does not appear to me to be justified when considering economic fundamentals," Noyer said. "Otherwise, they should start by downgrading Britain which has more deficits, as much debt, more inflation, less growth than us and where credit is slumping." The bolded sentence confirms two things: i) that the Nash equilibrium in Europe is now fatally broken, because when you have the head of one central bank doing all he can to throw another central bank under the bus, that's pretty much game (theory) over; and ii) when he said that "the agencies have become incomprehensible and irrational. They threaten even when states have taken strong and positive decisions. One could think that the use of agencies to guide investors is no longer valid." it proves that this amateur has no more understanding of basic finance than your generic Reuters blogger, both of whom apparently fail to comprehend that there are several hundred thousand bond and loan indentures in the real world, not the world of "S&P has no credibility so ignore it", which are loaded with covenants discussing springing liens, rating indexed interest levels and collateral thresholds, all of which are based on a sovereign and corporate rating, and all come into play in a completely unpredictable way (hint AIG - the reason why AIG imploded was because a rating agency downgrade unleashed a terminal margin call) when there is a rating downgrade. Such as that of France in a few hours to days top.

From S&P: "Standard & Poor's Ratings Services today placed its long-term sovereign ratings on 15 members of the European  Economic and Monetary Union (EMU or eurozone) on CreditWatch with negative implications. .. We expect to conclude our review of eurozone sovereign ratings as soon as possible following the EU summit scheduled for Dec. 8 and 9, 2011. Depending on the score changes, if any, that our rating committees agree are appropriate for each sovereign, we believe that ratings could be lowered by up to one  notch for Austria, Belgium, Finland, Germany, Netherlands, and Luxembourg, and by up to two notches for the other governments.  [THIS MEANS FRANCE]"

Here it comes. From the FT: "Standard and Poor’s has warned Germany and the five other triple A members of the eurozone that they risk having their top-notch ratings downgraded as a result of deepening economic and political turmoil in the single currency bloc. The US ratings agency is poised to announce later on Monday that it is putting Germany, France, the Netherlands, Austria, Finland, and Luxembourg on “creditwatch negative”, meaning there is a one-in-two chance of a downgrade within 90 days. It warned all six governments that their ratings could be lowered to AA+ if the creditwatch review failed to convince its experts. Markets have been braced for a potential downgrade of France but few expected Germany’s top rating to be called into question. With regard to Germany, S&P said it was worried about “the potential impact (...) of what we view as deepening political, financial, and monetary problems with the European economic and monetary union.” Standard and Poor’s has warned Germany and the five other triple A members of the eurozone that they risk having their top-notch ratings downgraded as a result of deepening economic and political turmoil in the single currency bloc." How this critical news was leaked, we have no idea. However, what is important is that now may be a good time to panic, unless Allianz has another CDO Quadratic plan up its sleeve...

Only the first of many French downgrades, this time by the rating agency which is always ahead of the pack. "Disastrous trend and the worst has yet to come. Over the past two fiscal years, the Republic of France's debt has grown by 21% from EUR1.32 trillion to EUR1.59 trillion. Meanwhile, FYE GDP declined slightly from EUR2.13 trillion as of 2008 to EUR1.93 trillion as of 2010...For the most part, over the past 18 months France has been exempted from the rise in funding costs. However, as the crisis evolves, we expect that France will be pressured. The deterioration in France's credit metrics combined with the needed supported for France's banks are likely to pressure the country. A major catalyst is likely to be the year end financials for France's banks; watch for a significant support program to be announced over the next couple of weeks."

For our French speaking readers, this makes it all too clear: "Selon plusieurs sources contactées par La Tribune, l'agence de notation Standard & Poor's pourrait préparer la France à la perte de son "triple A"."

In case anyone was wondering why the EURUSD is back to levels from several hours ago and well off the ramp highs (with ES continuing to pretend nothing matters), it is due to Bank of France Governor Christian Noyer who speak the following bullet points at a forum in Tokyo:

• Crisis Has Worsened Significantly
• Market stress has intensified and Europe is in a “true financial crisis,”

In other words precisely what Zero Hedge readers have known all along, the same as this article from the FT which shows what we presented to readers last week. As for those who like listening to the French grovel here is you desert:

• Markets and some governments think the ECB should buy more govt debt

Because €1 trillion is never enough...

It just goes from bad to surreal in Europe where the latest moment of pure Greek "gods kill titans" tragicomedy, comes from French rating agency Fitch threatening to cut... France? Excerpts via Bloomberg:

• FITCH: FRANCE CAN'T ABSORB MORE SHOCKS WITHOUT UNDERMINING AAA
• FITCH: FRENCH AAA WOULD BE AT RISK IF CRISIS INTENSIFIES
• FITCH: ADDED MEASURES LIKELY NEEDED FOR FRANCE '13 DEFICIT GOAL
• FITCH PROJECTS FRANCE DEFICIT IN '13 ABOUT 4% OF GDP

Having followed the fortunes of the beleaguered Belgian bank from before it appeared on anyone's worksheets, we are hardly surprised that the EU Commission charged with confirming the good-bank / bad-bank restructuring is concerned at the deal that Belgium has with the French (and Luxembourg) government to backstop/finance Dexia's debt. Belgium's De Standaard (and two other European newspapers) today suggests the Belgians fear the EUR90bn deal is 'not feasible' as it stands (with a Belgium 60.5%, France 36.5%, and Luxembourg 3% weighting). Given the change in market conditions the commission, according to the article, is concerned at the ability of each country to finance its respective guarantee (most obviously Belgium) and therefore can renegotiate the October bailout deal. Belgian FinMin Reynders would not confirm the renegotiations but was evidently waiting on the commission's 'comments or additions'. The French are obviously not-amused and of course, any increase in the size of France's guarantee will further impact its ability to maintain the much-vaulted AAA rating. It seems that Belgium is 'pulling a Greece' - knowing that it has all the leverage and France has much larger exposure to the problem - once again the unintended consequence of TBTF is writ large.

These days the biggest single catalyst to a big gap down is the arrival of 3 am Eastern at which point Europe opens and specifically that one all important instrument, Italian BTPs, start trading. Sure enough, European risk aversion is back, hot on the heels of not only the completely expected Stuporcommittee agreement to disagree and put the US rating at risk, but following a Figaro report that it is now Moody's (as a reminder it was S&P which almost blew up the OAT market one week ago with that "technical glitch") that is contemplating a French downgrade. From Reuters: "Ratings agency Moody's believes the recent rise in interest rates on French government debt and weaker economic growth prospects could be negative for France's credit rating, newspaper Le Figaro on Monday reported the agency as saying. "Presistently high financing costs combined with a deteriorating economic outlook could increase the difficulties that the government faces, with negative implications for credit," the newspaper quoted Moody's as saying. Reuters sought but was unable to obtain confirmation of the reported remarks from the the ratings agency. On Oct. 17, Moody's said it could place France on negative outlook in the next three months if the costs for helping to bail out banks and other euro zone members overstretched its budget." The result: a resumption of the bloodbath. France CDS rise to 11 bps to match record 233. Italy CDS rise 15 bps to 543. Belgium CDS rise 12 bps to 337. The three-month cross-currency basis swap  was 131 basis point below the euro interbank offered rate at 8:45 a.m. in London, the most expensive since December 2008, according to data compiled by Bloomberg. The rate was 130 on Nov. 18. As for cash spreads: they are not at all time records... But they will be shortly, especially since the ECB is largely missing from the market today: telegraphing that it won't monetize? Or is there a hit job on yet another European leader? Which Goldman leader will replace Sarko?

Time to start stocking up on those long term, OTM armageddon puts yet?

Time for some geopolitical uncertainty to add to Europe's bond yield inferno.According to AP, "France's ambassador to Syria says the government in Paris has ordered him home in the wake of recent attacks against diplomatic missions and a crackdown by Syrian President Bashar Assad's regime. Ambassador Eric Chevallier said by phone Wednesday he "was aware" that he had been ordered back but declined to provide details. He deferred all questions about the reasons to the Foreign Ministry. The ministry declined immediate comment. France, Syria's former colonial ruler, has been increasingly critical of Assad's regime in recent weeks, urging him to step down, pressing for tough international sanctions, and meeting with opposition figures." If this is indeed an indication that a Syrian "liberation" is imminent look for other ambassadors to be quietly pulled. Also, look for Iran to mobilize as any invasion or air campaign against Syria will be perceive as an assault on Iran itself. Or look for "offensive" action by Syria to invoke "retaliation." That would be precisely the false flag that the anti-Iran lobby needs to send WTI into the stratosphere. Then again it is not as if WTI needs any more reasons to surge higher today.

With Italian bonds giddy at the prospect of changing one worthless political muppet with another, if only for a few hours, and especially with the stern and long overdue assistance of the ECB (we will find out how many bonds Mario Draghi bought this week to preserve the price stabeeleetee next Monday - we expect the SMP cumulative total to pass €200 billion, a number which will delight Germany), it is becoming increasingly clear that France needs to be urgently added to the list of countries eligible for ECB secondary market "sponsorship", because while Italy yields are gapping in, Franch Bund spreads have since blown out back to record levels, following some modest tightening earlier in the morning. And unlike yesterday, this time there are no downgrade rumors to be blamed. At least not yet.

If anyone needed the proper epitaph for the insane stupidity out of Europe, Reuters may have just provided it. In an exclusive article, Reuters stuns us with the following: "German and French officials have discussed plans for a radical overhaul of the European Union that would involve establishing a more integrated and potentially smaller euro zone, EU sources say. French President Nicolas Sarkozy gave some flavour of his thinking during an address to students in the eastern French city of Strasbourg on Tuesday, when he said a two-speed Europe -- the euro zone moving ahead more rapidly than all 27 countries in the EU -- was the only model for the future." It gets much worse: "The discussions among senior policymakers in Paris, Berlin and Brussels go further, raising the possibility of one or more countries leaving the euro zone, while the remaining core pushes on towards deeper economic integration, including on tax and fiscal policy." Not sure how to further clarify this: Europe is preparing for its own end, and the dissolution of the existing structure of the Eurozone, which likely means an end to the EU in its current format, a reshaping of the customs union, and the overhaul of the zEURq.PK in its current form. Ironically, this may end up being favorable for the Euro... and detrimental for Germany. So the question is: will Germany go for it? At this point, it probably has no choice, unless it wants a mutiny on its hands.

French Bund spreads have just crossed 147 bps as the "cash bond long yet unable to hedge with CDS" crowd realizes that the Italian contagion is about to hit Paris. And unable to hedge using creative modern financial instruments, said crowd has reverted to the good old fashioned version thereof. We call it selling. Expect the spread to hit 150 bps momentarily.

Uhm, what was that? The Bund-OAT spread just soared by 7 bps to an all time record 129 and widening, which we expect is due to the EFSF bond pull. Expect a 130 handle any second...So Europe now has France to add to the Greek and Italian communicating vessels? Good work.