Wednesday, November 23, 2011

Sarkozy's New Challenge: Protecting France's Credit Rating

Given the fact that the European Union's recovery is riding on the full faith and credit of a select few of the strongest union members. Sarkozy ia facing yet another challenge as guardian of France’s credit rating. Particularly in light of fact that France is the primary guarantor for the bailout program.

Hope for an improved fiscal outlook for both Greece and Italy, allowed markets to exhale this month. This was fueled by the progress Greece made toward naming a new president, and the new bail-out plan. Many markets have already made back much of the losses over the past few months, but volatility continues to be a concern. Attention was temporarily transferred away from Greece, and the growing concern about Italy after S&P erroneously issued a warning that they may downgrade France’s rating. In an instant, the overly sensitive market reacted, resulting in higher bond yields for France’s debt, marking a 4 month high.

For the bailout to work, the euro-zone requires other triple -A nations to step up and increase their guarantees. The bailout fund is structured to hold a triple-A-rating, but this is based on the underlying strength of France’s credit rating. France is the second largest economy in the European Union, following German. However, as far as the resolution to the EU fiscal crisis, France is the blue-chip guarantor - representing the Union’s ability to navigate themselves out of the financial hole. Accordingly, a reduced rating France, will undoubtedly have an impact on the firepower of the fund.
Frances President, Sarkozy, has made it his mission to protect France’s credit rating. The Wall Street Journal reported that Sarkozy’s has made guarding their Triple-A credit rating a “battle ground for the coming presidential elections in the spring” Sarkozy unveiled, not one, but two austerity packages since late august in an effort to signal to investors that France can and will meet its deficit targets.

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K. Reilly
The Cohn-Reilly Report

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