France

European credit and equity markets rallied today but there was considerable relative underperformance by the former (especially in financials). Sovereign spreads leaked wider all day and started to lose it more rapidly into the close. It looks like Senior versus Subordinated decompression trades were placed in the European afternoon (a bearish trade ion financials) and even with the ECB in the market, BTPs closed above 500bps over Bunds (just shy of 7% all-in yields). Broad risk assets also lost ground as Europe's bid eased off as Oil eased back off its best levels and FX carry came off its highs of the day. US Treasuries are rallying after trying to converge earlier and 2s10s30s is also dragging risk lower for now.

• Market talk of a French sovereign downgrade continues to do the rounds – Unconfirmed
• German Unemployment Change (000's) (Dec) M/M -22K vs. Exp. -10K (Prev. -20K, Rev. to -23K)
• EU says the commission and member states have submitted amendments for new EU treaty

While nothing out of Italy or France was on the bond docket today, other countries in Europe will be issuing bonds on a virtually daily basis as the continent prepares to roll an record amount of debt in Q1, and in January as well (full calendar here). As such we saw new Bill issuance from Belgium and from Netherlands. The waffle country sold €1.280 billion in 3 Month T-Bills at a 2.13 Bid To Cover, a plunge compared to the 8.59 previously, albeit with the yield dropping from 0.78% to 0.264% as it falls flatly within the risk-free period defined by the 3 Year LTRO. Belgium also issued €1.155 6 Month T-Bills at a 2.01 Bid To Cover compared to 2.76 previously and a rate plunging from 2.438% to 0.364%. Elsewhere the Netherland also took advantage of the now mixed LTRO euphoria to sell €4.65 billion in Bills, specifically €2.99 billion in March 2012 Bills pricing at 0.00% (compared to negative -0.007% before), and €1.66 billion December 2012 Bills at a yield of 0.05% - obviously the market is still enamored with Netherlands as a safe haven on par with Germany. And speaking of the LTRO, that carry trade concept is now dead with the year end cash parking theory scrapped following the announcement thet banks parked the second highest amount in history at the ECB, or €446 billion, just shy of the €452 billion hit on December 27.

Fitch admits, via Bloomberg headlines, what we already knew:

*FITCH: EFSF DEBT 'AAA' RATING DEPENDS ON FRANCE REMAINING 'AAA'

*FITCH SAYS RISK OF EFSF DOWNGRADE HAS INCREASED

While certainly humorous, entertaining and very, very childish, the recent war of words between France and Britain has the potential to become the worst thing to ever happen to Europe. Actually, make that the world and modern civilization. Why? Because while we sympathize with England, and are stunned by the immature petulant response from France and its head banker Christian Noyer to the threat of an imminent S&P downgrade of its overblown AAA rating, the truth is that France is actually 100% correct in telling the world to shift its attention from France and to Britain. So why is this bad. Because as the chart below shows, if there is anything the global financial system needs, is for the rating agencies, bond vigilantes, and lastly, general public itself, to realize that the UK's consolidated debt (non-financial, financial, government and household) to GDP is... just under 1000%. That's right: the UK debt, when one adds to its more tenable sovereign debt tranche all the other debt carried on UK books (and thus making the transfer of private debt to the public balance sheet impossible), is nearly ten times greater than the country's GDP. To call that "game over" is an insult to game overs everywhere. So here's the bottom line: France should quietly and happily accept a downgrade, because the worst that could happen would be a few big French banks collapsing, and that's it. If, on the other hand, the UK becomes the center of attention (recall this is the same UK that allows unlimited rehypothecation of worthless assets, and the same UK that unleashed the juggernaut known as AIG-FP's Joe Cassano - after all there is a reason why the UK has 600% its GDP in financial liabilities - financial innovation always goes there where it is least regulated), then this island, which far more so than the US is the true center of the global banking ponzi scheme, will suddenly find itself at the mercy of the market. At that point the only question is whether the vigilantes will dare to take down the UK, as said take down will result in an implosion in the very fabric of modern finance, much more so than what even a full collapse of France could ever achieve, or if due to the certain Mutual Assured Destruction that would follow a coordinated UK onslaught, the market will simply very quietly proceed to ignore the elephant in the room.

With Europe in desperate need of some entertainment in advance of what looks set to be a sad holiday season, the UK and Britain are willing to oblige. In a spat that hit fever pitch after (the ECB's!) Christian Noyer said two days ago that it was Britain that should be downgraded, not France, we have just had the first two blank ICBMs lobbed at opposing territory. As the BBC's Hugh Pym reports, Deputy PM Nick Clegg, calling in from Rio (unclear if he was there battling the imminent invasion of unhacked US drones following the pseudo act of war on behalf of Brazil telling Chevron to go to hell) tells French PM "recent remarks from members of the French government about the UK economy were simply unacceptable." Clegg comments follow French Finance Minister Baroin saying "economic situation in Great Britain is very worrying...." And so the childishness escalates more, pushing Europe even further into crisis instead of someone doing something about fixing the only thing that can possibly help the insolvent world: starting preparations for a global restructuring. As for the idiotic pissing contest between the two countries with epic chips on their shoulders, the final appropriate outcome would be Moodys and S&P coming out and downgrading them both to junk, and even that would be optimistic.

The latest scandalous childish spat in Europe is not between some hardcore religious fanatics in the former Yugoslavia, but between the two countries that traditionally (at least in post-war Europe) have been at the forefront of sense and stability: France and the UK, where things got out of joint after David Cameron vetoed the recent G-27 attempt to bailout French and German banks on the taxpayer's dime, quickly followed up by a media war, and culminating with the idiotic announcement by Bank of France head Christian Noyer who said it is not France who has to be downgraded, but the UK. For our thoughts on this ridiculous statement, which merely confirms how clueless Europe currently is, see here. We will say no more about who is more hopeless between the two - it is pretty clear that in a global coordinated ponzi, everyone is only as strong as the weakest link, especially among the AAA-club: the fact that a central bank head does not, is grounds for great concern... so instead we will leave it up to our readers. Below, courtesy of Reuters, we present a tableau of the key economic dataseries for the two countries, and benchmarked against Europe's strongest economy: Germany. So is Cameron right in saying he is protecting the UK taxpayers by keeping them isolated from the European maelstrom, or is Noyer correct when he says that the UK is far worse off? Readers decide.

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.