Market Report - France

Apologies for having not updated the site in a while.  I was recently required to construct a market report on France which I thought may be of interest to some of my readers:

Overview

The French economy was reported to have expanded by an encouraging 0.4 percentage points in Q3 (QonQ) on Tuesday, having experienced a 0.1 percentage point contraction on the previous three readings.  This compares to a 0.2 percentage point expansion across the currency bloc. 

In an effort to balance public favour with an essential requirement for French austerity, the same Nicolas Sarkozy who marched into a European Finance minister’s meeting Brussels in 2007 proclaiming ‘France would postpone its commitment to balancing it’s budget by 2 years’ has recently attempted to reinvent himself through adopting unspecific plans to raise €65bn through tax hikes and budget cuts over the next 5 years.  Economists say there is no visible growth strategy in place to counter these cuts.  This move is largely thought to protect France’s AAA credit rating which Moody’s currently has under review.  On November 7 the government unveiled its second austerity plan in three months.  This one promises an extra €7bn in 2012 on top of the €11bn announced in August at an emergency meeting.  Despite these cuts, a report by the Lisbon council on Tuesday said France’s inability to make rapid adjustments to its economy should be ringing alarm bells for the Euro zone.  It ranked France 13^th out of 17 for its overall health, including its growth potential, employment rate and consumption, and 15^th for its progress on economic adjustments, particularly on reducing its budget deficit and keeping a lid on unit labour costs.

‘Analyst sentiment predicts France is likely to slip back into a mild recession by the end of the year’ a comment from ING Economist Carsten Brzeski states.  A senior EU official highlighted the important contribution France must offer over the next month if the Euro zone is to be protected:  “Between now and December 9^th [date of next European Summit], Germany has to decide what it is prepared to put on the table to save the euro and others, especially the French, have to show how far they are willing to go to meet Germany’s requirements.”

Financial Markets

French equity markets have been hit particularly hard since the start of August, primarily due to vast Banking sector exposure to Greek debt ($51.3bn).  While the threat of a double dip recession looms large, the CAC40 has increasingly been leveraged to European systemic risk.  A 50% voluntary write down on privately held Greek government debt offered French Banks temporary relief to plummeting share prices.  BNP Paribas rose c.20% on the news but has since retraced to support at €0.30 per share (down from a high of €0.60 in February).  Other French banks have followed suit reflecting investor concern for Greek debt exposure.

On Tuesday 15^th, French sovereign bond yields triggered alarm bells as bearish sentiment began to weigh in on the concern that European debt contagion (and the ineffectiveness of European politicians to solve the crisis) was starting to have an influence on the safety of French debt.

At market close, 10 year French Bond yields sat at 3.71%, a euro-era high.  "It's a confidence crisis," said Elwin de Groot, a senior market economist at Rabobank Nederland in Utrecht, Netherlands. "Investors have no confidence that the euro zone can solve its problems. They will look for the most safe place they can store their money, which is Germany. Everything else is suffering."