Record French bond gap shows eurozone tensions

The gap between German and French sovereign borrowing rates widened to a record on Thursday and the 10-year cost of borrowing for Italy reached a record briefly above 6.402 percent.

The Germany-France spread on 10-year borrowing rates, a critical pressure point in the eurozone, widened to 1.358 percentage points and the Italian rate, which eased to 6.319 percent, puts Italy borrowing costs close to unsustainable levels.

Germany and France are the economic and political pillars of the eurozone, and France which trails Germany in economic performance is anxious to hold on to its top AAA credit rating.

A widening of the spread between German and French rates is a sign of tension at the heart of the eurozone.

In recent days, funds have moved into buying German debt as a defence in times of great uncertainty over the eurozone and Greek debt crises.

Meanwhile, the price of French bonds has eased, pushing up the fixed rate on French bonds as a percentage of the new price. This has widened the gap or spread.

The immediate critical pressure point in the eurozone is the borrowing rate indicated for Italy as funds move out of Italian bonds, pushing up the fixed yield.

The shock decision by Greece to hold a referendum on a complex eurozone-Greek debt package has raised openly the possibility that Greece might leave the eurozone, or might be forced into a disorderly default on its debt payments.

This has raised a range of uncertainties on financial markets, for example about the ability of many European banks to absorb any repercussions from a Greek default if it occurred. This has therefore refocused attention on the debt of other countries in the eurozone considered to be weak.

Countries already being rescued alongside Greece are Ireland and Portugal, but the main concerns are Italy, with the third-biggest economy in the eurozone and a huge debt mountain, and Spain.

The European Central Bank has been supporting the weaker countries, by buying their debt from banks and financial companies and also by providing finance on a regular basis to prop up banking systems.

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Paris, Berlin agree on future eurozone budget: French ministry source

France and Germany have agreed on the broad outlines of a proposed eurozone budget which they will present to EU finance ministers in Brussels on Monday, a French finance ministry source said.

Paris, Berlin agree on future eurozone budget: French ministry source
French Economy and Finance Minister Bruno Le Maire (R) and German Finance Minister and Vice-Chancellor Olaf Scholz. File photo: AFP

The common single-currency budget was one of French President Emmanuel Macron's key ideas for protecting the euro, but it caused differences between France and Germany, the region's two largest economies.

French Finance Minister Bruno Le Maire and Germany's minister, Olaf Scholz, will “jointly present a proposition on Monday… about the layout for a budget for the eurozone,” the ministry source told AFP.

“It's a major step forward,” the source said. “We will look forward to sharing with other members.”

The source said the amount of the budget has not been established as the proposal was to first set out the “architecture and main principles” of the budget.

According to a copy of the French-German proposal, the budget would be part of the EU budget structure and governed by the 19 euro members.

Macron will travel to Berlin at the weekend to meet with German Chancellor Angela Merkel where the two leaders will bolster their alliance as champions of a united Europe.

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