The equity markets came under further downward pressure today. The fresh concerns that have arisen in the last couple of session have been directed at France.
There was speculation yesterday that France, the eurozone’s second largest economy, would lose its AAA credit rating (as the US had done in the past week). Three main rating agencies (Standard & Poor’s, Moody’s and Fitch’s) have all announced this week that France’s top credit rating is secure, and have confirmed the allocation of a ‘stable’ outlook.
As a result of these fresh eurozone concerns and ongoing fears of another global recession, European stocks opened poorly this morning. The share prices of major French banks such as BNP Paribas, Credit Agricole and Societe Generale fell by as much as 20% in a day. The FTSE 100 dipped below the key 5000 benchmark and the French index, the CAC 40 has made major losses as well, as you might expect. However, a strong start to the US session has boosted market confidence a little, suggesting equities had been oversold.
So what’s all the fuss about? Well, France has high debt, a huge deficit and major exposure to peripheral debt. The market is incredibly nervous at present and highly sensitive to rumours, and the French banks fell foul in a major way.
What would happen if France lost its AA credit rating? Well, this would almost certainly be a catastrophe. The absence of the top rating will discount France as a guarantor for loans to the periphery. This leaves Germany to bailout Spain and Italy (if...or as some are predicting, when this becomes necessary) pretty much on its own. Can Merkel really justify this to the German people, bankrolling the rest of the eurozone because they could not help but to irresponsibly accumulate totally unsustainable debt?
France’s credit rating then, could well be the tipping point to the Armageddon situation that so many commentators are forecasting- the end of the euro. This could well explain why the stock market hit French banks so hard this week.
Richard Driver
Senior Analyst – Caxton FX
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