France: Savior, Save Yourself

 |  Includes: BUNL, EWG, EWI, EWP, EWQ, ITLY
by: Richard Shaw

France and Germany have been leading the efforts to stabilize the European credit crisis. The solvency problems have moved from Ireland, Portugal and Greece, to concerns about Spain, but now questions arise about France.

If France is one of the saviors, can it do that and also save itself?

While French 10-year Treasury rates are not huge, they are increasing, and the spread over German rates is rising. As the world's fifth largest economy, that is concerning.

While French 10-year bonds are only 183 basis points over German 10-year bonds, that is more than their long-term average of 21 basis points (~9 times the average spread).

Click to enlarge

Click to enlarge

Click to enlarge

Similarly, Spain is 451 basis points over Germany, compared to a long-term average of 46 basis points (~10 times the average spread); and Italy is 513 basis points over Germany versus a long-term average of 63 (~8 times the average spread).

These charts show the rates for 10-year government bonds for Germany and France as well as Italy and Spain for more than a decade.

Click to enlarge

Click to enlarge

Italy and Spain rates are up markedly - Italy more so than Spain. Both France and Germany saw bond rates declining, but as of late, French rates have begun to rise while German rates have risen only slightly.

France is falling out of favor while Germany is still the European strength.

France has a voice in the solution to the European debt crisis, but they are being viewed by the bond markets as less and less able to carry the burdens that any likely solution will entail.

Disclosure: QVM does not have positions in any mentioned security as of the creation date of this article (November 16, 2011).

Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.