Question: whose 10-year bond yields have risen more in the past two days' trading: Italy or France?
The answer is France, which has travelled from 3.15% on Wednesday morning to 3.48% Thursday afternoon (as at 6pm). Italy has gone from 6.75% to 6.95%. Of course, that's not the main story of the week, since Italy ended last week at 6.3% and touched 7.5% during Wednesday's drama. Even so, the blow-out in France's spread over Germany – a record in the euro era of 168 basis points – illustrates how the crisis is spreading.
Standard & Poor's, which erroneously dispatched a message on Thursday that France's credit rating had been downgraded, can't take all the blame (though the "technical error" was appalling). The deeper reasons include:
1. French banks are carrying more Italian debt than anybody else – about €300bn worth. That's on top of the writedowns they are currently taking on their large Greek exposures.
2. Within the worsening outlook for eurozone growth published by the European commission on Thursday, France came off badly. Don't expect growth of 2% next year: the new figure is just 0.6%.
3. A credit rating change now seems more likely, even if S&P has fixed its computer. In the tail-wags-dog world of ratings agencies, higher yields tend to make downgrades more likely.
4. There is the worry that any attempt at bailing out Italy would put intense pressure on France. The European financial stability facility is backed by guarantees from member states. Italy obviously couldn't give guarantees on loans to itself, so a greater burden would fall on others. Alternatively, any officially sanctioned "haircut" for holders of Italian debt would rebound on French banks.
Valérie Pécresse, the French budget minister, is entitled to argue that France is "not at all in the same situation" as Italy. The trouble is, in the eyes of some investors, betting against French bonds has suddenly become two bets for the price of one. It's a cheap way to bet against the eurozone finding a painless solution to the Italian muddle; and it's a way to gamble that the latest French austerity package, a mix of tax rises and spending cuts, won't be enough to hit the deficit targets and thus satisfy ratings agencies.
