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By Scott Boyd

Having presented a unified front through much of the ongoing European debt crisis, the recent intervention by the European Central Bank in the sovereign bond markets has led to a major disagreement between France and Germany. In a nutshell, France wants to see the ECB do more to keep the lid on bond yields, while Germany feels the ECB lacks the authority to carry on a major bond purchase operation.

Markets were initially caught off-guard as the two largest Eurozone economies engaged in a little public sniping. Should this escalate beyond a simple disagreement on a single aspect of the ECB’s role, it could further undermine confidence in the Eurozone’s ability to manage the debt crisis.

Still, France’s pushing for the ECB to buy up bonds to suppress further yield increases has a whiff of self-preservation about it. It also confirms that the debt contagion spreading across Europe is now fixing its sights on France, with the first casualty likely to be France’s triple A credit rating.

The first hint of the scope of the trouble awaiting France is that like Greece, Spain, and Italy, the yield spread between French sovereign debt and the benchmark German Bunds continues to grow. For Italy and Spain, yield rates are rapidly approaching levels analysts say will be unsustainable making the prospect of a default all but inevitable.

Despite the Euro-era record spread of 195 basis points recorded on Wednesday, French bond yield rates still remain manageable. This could all change very quickly should France suffer a credit downgrade and French officials are clearly spooked at the prospect of investors demanding even higher premiums. This certainly explains the appeal to the Bank to expand its asset purchase program.

Eurozone Solidarity Showing Cracks

As the threat of debt contagion continues to spread through the Eurozone, deeper divisions are starting to appear in the solidarity of the member states. Dutch Prime Minister Mark Rutte was quoted as saying that there should be a mechanism to expel countries that continue to flout the fiscal guidelines required for Eurozone membership.

Even Merkel’s own party voted to allow for Eurozone members to unilaterally secede from the union.

Source: France And Germany Break Ranks Over ECB Intervention