French Downgrade; European Dominoes?

later12

Well markets are indicating this afternoon that a French downgrade is on the horizon
http://www.forexcrunch.com/moodys-to-downgrade-france/

While this might not look like it is of much significance at first, it could be potentially disastrous for the Eurozone in the new year. It looks as though the debt contagion is spreading throughout European markets and some Eurozone countries could face increased difficulties in refinancing next month.

While this was widely anticipated, what was not anticipated was the early manifestation of such fears right before Christmas. Already the Euro has depreciated to its lowest point against the Swiss Franc ever recorded, the Swiss franc now seeming more and more like the equivalent of European Gold. The Euro has also slipped against the yen and dollar. Something that should be considered to balance this development could be the short trading volumes during Christmas week - that sometimes causes some strange anomalies to arise on the market.

Credit Default Swaps (similar to insurance against losses on French debt) are rising as uncertainty grows about this core European economy. What is even more shocking is that it has spread to Germany. CDS on German Bunds have now risen to their highest point in the year.

I predict this trend if it continues, it shall have an early and a significant negative impact on Ireland and the Irish banks - and there will be some significant developments within the next months as regards future ECB funding arrangements.

dan_d

We drastically need a Euro wide plan, and not a "run to each country and bail them out as the markets dictate" strategy, as we seem to be operating on now.

It may not seem like much, as you state, but taken against the bigger picture that is the current economic backdrop, it should be taken as a warning sign.Whether it is a portent of things to come, it should be treated seriously, and appropriate action taken. Things cannot continue the way they are.

later12

Yes but European leaders have been showing a startling inability to respond decisively lately. In fact I think that is perhaps the biggest problem with the Eurozone - its inability, due to its structure, to act decisively or boldly in a crisis like this.

Anyway this is a serious wake up call. I think this will force the Eurobond idea back on the table earlier than expected, that or the necessity of increasing the EFSF ceiling.