* French Borrowing Costs Rise at Auction as AAA Rating Faces Threat of Cut
“This is proving to the market again that they can still raise finance without too many difficulties,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “There’s still the threat of a downgrade hanging over France and until we get that situation cleared up you can’t signal the all-clear and it’s still going to be vulnerable.”
France has the biggest debt burden of the six top-rated euro nations, at 85 percent of gross domestic product. The extra yield investors demand to hold French 10-year bonds instead of benchmark German bunds rose to 204 basis points on Nov. 17, the most since 1990, as concern deepened Europe’s debt crisis was spreading. While the gap was 145 basis points at 12:24 p.m. Paris today, it compares with a premium of 44 basis points for AAA rated Finland and 37 basis points for the Netherlands.
The euro extended its decline against the dollar, reaching the weakest level in 15 months, after French borrowing costs rose. The 17-nation common European currency was 0.8 percent weaker at $1.2845 at 10:19 a.m. London time.
Other Sales The French sale came a day after Germany sold 4.1 billion euros of bonds, getting more bids than its maximum target of 5 billion euros. The German sale kicked off a rush for funding that may determine whether euro-area leaders can save the 13- year-old single currency. Italy and Spain are among countries that in the coming weeks will sell debt that may reach 262 billion euros in the first quarter, according to Deutsche Bank AG forecasts.
France sold securities maturing in October 2021, October 2023, April 2035 and April 2041. The bid-to-cover ratio, or the number of bids for each unit of debt sold, for the 10-year-old fell to 1.64 from 3.05.
“It’s the first French auction of the year and it has broadly gone as expected,” said Peter Goves, a fixed-income strategist at Citigroup Inc. in London. “Where France is trading, a lot of negatives are in the price, especially downgrade concerns. Spanish and Italian sales will be more of a litmus test for the market.”
Sarkozy’s Efforts Ratings companies such as Standard & Poor’s and Moody’s Investors Service are reviewing the sovereign credit grade of Europe’s second-largest economy, while Fitch Ratings cut the country’s credit outlook on Dec. 16 on the “heightened risk of contingent liabilities” from the euro-region crisis.
French 10-year bonds fell for a seventh-straight day today, with the yield climbing as high as 3.37 percent yesterday, the most since Dec. 9, and widening the spread with bunds. The 10- year yield rose 3 basis points to 3.34 percent today. It climbed to a high last year of 3.82 percent on Nov. 17 and fell to a low of 2.44 percent on Sept. 12.
Today’s sale by the French debt-management body, Agence France Tresor, comes as President Nicolas Sarkozy — who faces re-election in about four months — seeks to protect France’s creditworthiness with tax increases and spending cuts.
France has also shrunk its 2012 bond-sale plan, with AFT saying last month it needs 177.9 billion euros in financing this year, down from the 182 billion euros estimated on Sept. 28.
Ratings Cloud To be sure, the average financing costs of medium and long- term French debt remains low. Last year, it was 2.8 percent, the second-lowest since the creation of the euro, after the 2.53 percent in 2010, according to AFT. The bid-to-cover ratio, or the number of bids received for each unit of debt sold, at auctions last year was 2.4, up from 2.1 in 2010.
S&P placed the ratings of 15 euro nations, including AAA rated Germany and France, on review for possible downgrades on Dec. 5. Moody’s said Dec. 12 it will review the ratings of all EU countries after a summit on Dec. 9 in Brussels failed to produce “decisive policy measures” to end the region’s debt turmoil.
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