This page has been archived and commenting is disabled.
The Next Push : France
Many investors understandably have not focused on France. The threat of scandal in Spain, the need for yet another round of government support for Italy's third largest bank and the country's upcoming election have commanded attention. What seems to have been a free ride for France may be coming to an end.
Even though the German economy contracted twice as much as the French economy in Q4, we learned this week, the implications for France are greater. Recent data suggests that the German economy has stabilized and may be expanding albeit slowly this quarter. French data continues to disappoint.
This is particularly important because the French government's growth forecast for this year is optimistic, well above the consensus. It was on the basis of the optimism that the Hollande government forecast that its deficit would fall to 3% of GDP, as the EU requires.
Following news that included the nineteenth consecutive monthly increase in French joblessness (Dec) and the larger than expected contraction in Q4, the French government will likely soon cut is 2013 GDP forecasts. The issue is whether it does so before or after the EC updates its forecasts at the end of next week. Currently the EC projects 0.4% growth in France, half of the government's forecast.
Hollande has sold the tax hikes and spending cuts on the basis that they were necessary to reached the 3% deficit target. Senior officials in the Hollande government, including Finance Minister Moscovici, are admitting, just six weeks into the new year, that the 3% target will be overshot. The push back was nearly immediate. Asumussen, the German member of the ECB's board, was crystal clear: France and Germany have a special responsibility to meet the 3% target.
Perhaps if one were sitting in the Elysee Palace, EU Commissioner Rehn's comments earlier this week that some members could be granted more time to bring the deficits in line with EU targets could apply to France. However, it is not clear whether France would be understood to have met the conditionality; namely a program in place to correct public finances.
Hollande is under pressure to take additional remedial action. One area that he is being forced by circumstances to address is the pension system which runs a large deficit. Some reports suggest Hollande is preparing proposals that include decoupling pensions from inflation. Pension reforms undermined Sarkozy's support and Hollande's support has waned.
In terms of policy, outside of the hike of the marginal tax rate of high income earners and the modification of the higher pension age introduced by Sarkozy, Hollande's policies as a Socialist, do not seem that different. The modest liberalization of the labor market seems perfectly consistent with the neo-liberal agenda. Perhaps Hollande has up until now relied more on tax increases than the right would have done, but that path appears to have been nearly exhausted and spending cuts loom.
Investors still appear to regard French bonds as slightly better yielding German bund. Over the past 60-days, the yield of the 2-year notes (of France and Germany) move in the same direct 96% of the time. The 10-year yields move together 93% of the time. French yields are inversely correlated to Italian yields, especially in the 2-year area, where the correlation is -63% (vs -11% in the 10 year sector). French bond yields are also inversely correlated with Spanish bonds at -43%. However, the correlation of 10-year bonds is zero, but trending up form -35% in mid-December.
Investors who share are misgivings about France should continue to monitor these correlations. A break down in the French-German correlation and an increase in the French-periphery correlation would suggest a new phase of euro area tension is at hand.
»
- advertisements -
It amazes me France has done as well as it has for long, given that every fundamental in the country is bad. Good analysis though to compare the French/German/Spanish 10 year to signal the next phase in the Crisis.
Think of global deleveraging as wringing out a wet towel. The towel has sopped up excesses in corporate/government spending and corruption. Wringing out those excesses means corruption boils to the surface, and corproate/government ineffiencies become visible and common knowledge to all.
The stock and bond market take care of the corporate side of the equation. If the TBTF banks did not have government sanction, they would be toast. That brings us to the government side of the equation.
Leaders in Government need to step up and prosecute corruption. Austerity is addressing some of the administrative aspects of government overspending. Austerity will take years to address it's related variable in the overall equation.
Prosecution of corruption is the focus of everyone's attention. Chris Dorner's actions ensured the target is well defined. It's time to quit worrying about styrofoam, sugar drinks, salty snacks and cheese doodles. It's time to step up and do the right thing. Otherwise, many will ask... What would Chris Dorner do in a situation like this?
But Berlusconi has just said that corruption is necessary in the way of doing business. Making a big deal of it is counter-productive. It's just the way things are and we should get used to it.
http://www.zerohedge.com/news/2013-02-15/berlusconi-bribes-are-necessary-not-crimes
See, it is a totally different mind-set in Eastern Europe and in Europe in general. It is probably that way in China, as well, since bribery and back-scratching have been around for millenia.
I don't see how to overcome such a dichotomy between what should be and what actually is, and the explicit acceptance thereof. I also don't see Italians or French going all renegade and firing off shots in downtown Milan. Their mind-set is that as long as they are left alone personally, especially in the rural or agrarian parts of the Continent, they couldn't care less what pockets Berlusconi has his hands in.
And with the Fed having British and French banks on direct-deposit every Friday night to the tune of billions, Berlusconi just may have a point. Europe is basically bribing the Fed to not crash the system and, knowing the consequences, the Fed pays the hush money.
It's just the way it is done. Get over it.
:/
Following your analysis, I propose a thought experiment. Where would a corrupt oligarch put their money? There comes a point where everyone wants out of Dodge because the "honest" sheriff just left town. Maybe the dishonest sheriff under your employ was just replaced or bought out. Look at the money that has left Russia. Look at China. Can either of these two become world powers when their elite always have one foot in the doorway?
Now, where would a developing middle class in a corrupt country invest their money? Would you pay bribes and start a business, or open a trading account? I know that corrupt regimes do not have middle classes, but let's follow what is unfolding in South America. I believe many Chinese are watching intently.
It will stay status quo until it doesn't. That is the way the world works. The trick is to determine when the winds change direction. Sometimes it has to get pretty hot before cooling winds prevail.
Where's Doc Holliday going, "Ah'm ya hucka-berry," when you need him?
I still believe Wall Street save Goldman is a coiled snake having annihilated Greece, Portugal and Ireland. The "target" (for lack of a better word) is France...although with crazy Italian elections just weeks away there could be some...ahem.."collateral" damage. (for those wishing further reading the title of the book was called "Takedown" in the 80's. As I recall it was related to Japans housing bubble...been out of print many years...clearly in need of re-issuing.