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Eurozone bond markets squeeze France

AFP · 17 Nov 2011, 15:00

Published: 17 Nov 2011 15:00 GMT+01:00

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French and Spanish borrowing costs shot up on Thursday as the spread between their bonds and those of Germany hit a record high despite political leaders' promises to end the eurozone debt crisis.

French President Nicolas Sarkozy is following the bond spread closely, worried that markets are losing confidence in the ability of all eurozone countries apart from Germany to manage their public deficits and sovereign debt.

The spread between 10-year French bonds and the equivalent German bund hit 200.6 basis points, or 2.006 percent. Spain's spread hit 489.5 basis points, or 6.649 percent, another record for the single currency era.

France now has to pay more than twice as much as Germany to borrow for 10 years, even though both theoretically carry the top AAA credit rating, which Sarkozy's government is fighting desperately to retain.

Markets were also watching France and Spain's latest new issue of shorter term bonds, which saw both countries forced to pay higher interest.

France raised 6.976 billion euros in two and five-year bond sales, and will pay 2.82 percent on a 3.3-billion-euro issue that is to mature on July 25th, 2016, up from 2.31 percent in a comparable sale in October.

Meanwhile, eurozone neighbour Spain had to pay a rate of 6.975 percent -- near the 7.0 percent level considered unsustainable -- to raise €3.563 billion ($4.8 billion) in an auction of 10-year bonds.

Paris stocks slid on the news, with the CAC 40 down 1.52 percent by lunch, and the index hovering close to the symbolic 3,000 point mark.

In the last few days all rates or yields on existing eurozone bonds have risen against the eurozone benchmark, the German Bund yield.

France owes €1.7 trillion, only slightly less than Italy, which has been put under IMF surveillance and given a new technocratic government led by respected economist Mario Monti in a bid to reassure the markets.

The French government has embarked on an austerity programme, but the European Commission has warned it does not go far enough and, with growth forecast to slump, Paris could fail to meet deficit reduction targets.

"The weeks to come will be decisive. Together we will succeed," Sarkozy said on Wednesday, in a letter to welcome Monti to office.

Sarkozy was expected to hold telephone talks with Germany's Chancellor Angela Merkel about the crisis, and markets are nervous about reports of a widening rift between the eurozone's two biggest economies.

France is pushing for the European Central Bank, with its near limitless resources, to take a stronger role in shoring up sovereign debts.

The idea is anathema in Berlin, where any suggestion that a central bank start printing money revives memories of pre-war hyperinflation, but there are signs Merkel is becoming increasingly isolated on the issue.

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The leader of eurozone finance ministers, Luxembourg's Prime Minister Jean-Claude Juncker, warned on Wednesday that Germany should not lecture others in the single currency bloc while its own debts remain high.

"I think the level of German debt is worrying. Germany has higher debts than Spain," he told the Bonner General-Anzeiger newspaper.

This year's eurozone debt crisis is the second major shock to the global economy since the 2008 credit crunch, and has spread from peripheral states such as Greece and Portugal to threaten relative giants like Italy.

With even "AAA" powers like France now in the firing line, it has shown up weaknesses in Europe's financial governance, as wildly different economies struggle to agree tactics under a single, conservative central bank.

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