Mon Dieu! French Banks Could Pull Down the Economy
Concern that France’s AAA bond rating might be downgraded began to abate Thursday, after French President Nicolas Sarkozy rushed back from the French Riviera for an emergency cabinet meeting and the European Central Bank provided overnight lending. The action gave a needed jolt to U.S. markets, with Dow regaining most of yesterday's losses, closing up 423 points.
But Paris is not out of the woods yet in escaping the same kind of Standard & Poor’s downgrade that sent the U.S. economy reeling. The country’s debt trajectory may not be sustainable. And the underlying well-being of the French financial system remains highly suspect.
None of this is new, of course. In April, before she became managing director of the International Monetary Fund, Christine LaGarde, then minister of economic affairs in the French government, told The Fiscal Times, “I am told they [French banks] are safe.” Hardly a ringing endorsement. Such doubt sows fears that threats to the financial health of banks could reemerge at any time.
France is not Italy in terms of debt or the probability of default. France’s debt to GDP ratio is expected to be 87% in 2012, while Italy’s ratio will be 119%. Nevertheless, as measured by the cost of insuring against a default, -- the likelihood of Paris getting in trouble has doubled in just the last year.