European Bloodbath Resumes After Figaro Reports Moody's Eyeing France Downgrade

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?

  • France 10-yr yield +6bps to 3.53%; hit 3.61% earlier
    • French spread over bunds +15bps to 165bps; recouping almost half of Friday’s decline
  • Spain 10-yr yield +13bps to 6.5%; hit 6.57% earlier; erasing all of Friday’s decline
    • Spanish spread over bunds +22bps to 463bps; first widening in 3 days though still below Friday’s record 503bps
  • Italy’s 10-yr yield +3bps to 6.68%; hit 6.75% but below the psychological 7% threshold
    • Italian spread over bunds +12bps to 470bps
  • Belgian 10-yr spread over bunds +14bps to 295bps; still below 320bps record last week
  • Austrian 10-yr spread over bunds +7bps to 150bps; below last week's record 192bps

Source: Bloomberg