France's Borrowing Costs Are Collapsing

Check out this chart of French 2-year yields via Bloomberg

image

Photo: Bloomberg

A few days ago, France was paying close to 0.6% to borrow money for 2 years.

Today: 0.17%.

As borrowing costs have re-surged in Spain and Italy, France is seeing major safe-haven flows, the likes of which you normally associate with Germany.

German 2-year yields are already slightly negative, and at this rate, French borrowing costs will be negative soon.

On the surface, this is a bit of a head-scratcher, given the widespread view that new President Francois Hollande is a spend-happy socialist who is doubling down on bad historical fiscal practices.

But the reality is, when it comes to these countries, is that fiscal soundness is much more about perception than reality. After all, Spain has put forth a decent effort on reforms so far. And Italy’s deficit isn’t that huge (though it’s debt is). Nothing that either country is doing is saving them from the sovereign debt collapse vortex.

At this point, the market is rendering a judgment on the Eurozone itself, and it’s figuring out who’s really in the club of those who are too big to fail and who isn’t. For now the market believes that France is in the club with Germany, of countries who absolutely are too big to fail, and would be saved to the penny come hell or high water. The market is not convinced of that with respect to Spain or Italy, and that’s why you have the divergence.

SEE ALSO: 7 headlines that are making everyone panic over Europe >

UPDATE: And just like that, France has sold 6-month bills at a negative yield for the first time, according to Bloomberg.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.

Tagged In

france moneygame-us