Record spread between German, French bonds

10th November 2011, Comments 0 comments

The spread between German and French 10-year government bond rates touched a historic high of 164 basis points on Thursday amid fears the eurozone debt crisis is spreading fast.

The wide gap in the cost of borrowing between the single currency bloc's two biggest economies reflects worries that France may join Italy and Greece in struggling to fund its debt while German bonds are highly sought after as a safer bet for nervous investors.

The spread hit 164 basis points -- 1.64 percentage points -- shortly before 0830 GMT, before falling to a still high 156 points half an hour later.

By 0930 GMT, the interest rate or yield on a 10-year French OAT bond was 3.295 percent, up from 3.189 percent on Wednesday, while that of its German equivalent the Bund was also up at 1.760 percent from 1.719 percent.

Ratings agencies have warned that France's coveted "AAA" rating for its own government debt could be at stake if it does not appear able to prevent contagion from the weaker Mediterranean economies spreading north.

"Let's not have any illusions. On the markets French debt has already lost its AAA status," warned Jacques Attali, former senior advisor to president Francois Mitterand and head of the European Bank of Reconstruction and Development.

"When we see the state's borrowing costs over 10 years and the direction of the Franco-German spread, French debt is treated as AA," he said, judging the government's latest austerity programme, announced Monday, as "obviously insufficient."

While French borrowing costs are rising, they are still much lower than those faced by Italy, which hit record levels on Wednesday and are still more than 7.0 percent, a level seen as unsustainable for long.

Paris has so far been spared the high drama that has gripped Athens and Rome as their grapple with their sovereign debt problems but private French banks are seen as overexposed to Greek and Italian debt.

© 2011 AFP

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