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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

French Central Bank Attacks British Economy As Eurozone Rescue Plan Starts to Disintegrate

Politics / Global Debt Crisis Dec 16, 2011 - 12:01 AM GMT

By: Nadeem_Walayat

Politics

Best Financial Markets Analysis ArticleFrench President Sarkozy let his attack dogs loose on Britain as illustrated by comments form the head of the French central bank, Christian Noyer attacking the British economy following threats of Standard & Poor's credit ratings agency downgrade of French Government debt as a consequence of the French banks exposure to bankrupting PIIGS debt.


Christian Noyer stated "A downgrade doesn't strike me as justified based on economic fundamentals. Or if it is they should start by downgrading the UK, which has a bigger deficit, as much debt, more inflation, weaker growth and where bank lending is collapsing."

The French Finance Minister, François Baroin, also jumped in with “Great Britain is in a very difficult economic situation, a deficit close to the level of Greece, debt equivalent to our own, much higher inflation prospects and growth forecasts well under the eurozone average. It’s an audacious choice the British government has made,” and referring to last weeks summit UK veto "with the singular, now solitary, exception of Great Britain, which history will remember as marginalised”.

The facts are that the markets as measured by the yield on the 10 year government bonds rate France at a far higher credit risk than Britain, with French Bonds trading at 3.20% whilst UK bonds trade at just 2.10% thus resulting in significantly lower financing costs for the UK which is apparently being enviously viewed on by the French in advance of losing their Triple AAA credit rating.

Whilst on face value Britain's economic and debt situation is worse than that of France which the recent article (28 Nov 2011 - Eurozone Being Swallowed by Expanding Debt Black Holes, Mega Bond Market Profits and Default Booms ) illustrated at length that UK total debt (public+private) approximates 500% of GDP against French total debt of 350%.

However, what the French central bank fools fail to acknowledge is that there are two major reasons why France is being accurately perceived as a far higher credit risk by both the markets and the one year behind the curve credit ratings agencies.

1. The UK can print money which the French gave up the right to do in exchange for a stable currency. This is a major advantage for the UK which virtually ensures that the UK would be the last country standing in Europe to default on its debts, AFTER all of the others including France, and even mighty Germany have gone bust because Britain can easily with just a whisper from George Osbourne's lips into the ear of Mervyn King conjure as much money as is needed into existence to monetize UK government debt, and have done so to the tune of £275 billion to date, which has been funneled to the banks to buy government bonds to reduce UK interest bond market interest rates whilst at the same time resulting in higher UK inflation, which is the price for printing money.

2. That French debt is denominated in euros and their currency is the Euro that is primed to collapse as a consequence of fellow bankrupting euro-zone members who's deficits are unsustainable and in fact have already triggered a default in all but name, i.e. Greece HAS defaulted on its debts, with Greek bond holders sitting on losses of upwards of 50%. Therefore France being in the Euro-zone shares the risks of default for many of the reasons why Greece defaulted also equally applies to France, which ensures that ultimately France is just a big version of Greece.

Whereas the UK has its own currency that it can print (debase) at will and therefore whilst volatility may be high there is no imminent risk of collapse of sterling on anywhere near the risk posed by euro-zone countries. The market knows that the Bank of England is always ready to monetize UK debt to alleviate short-term pressures that would result in collapse of the banking system. In fact the primary risks to the UK banking system at this point in time are contagion risks out of the Eurozone that's PIIGS, French and German banks triggering a chain reaction collapse of the global banking system a taste of which we recently witnessed with the collapse of the MF Global as a consequence of over leveraged exposure to Italian government bonds which resulted in the loss of actual deposits of customers who had little understanding that their funds / were being used as collateral to purchase Italian government debt.

So the head of the French Central bank is clueless on the actual facts of the situation, which explains why the French economy is doomed ! For the risks of a collapse of the banking system most definitely are with a trigger out of France and the Eurozone than the UK, therefore the credit ratings agencies whilst being several years behind the markets are correct to see the credit worthiness of French debt as being significantly lower than that of the UK for it does pose a far greater risk.

But what the credit rating agencies are publically deliberately ignoring is the fact that no government would be able to escape the consequences of a collapse or default of the debts of any major economy, they would all fall like dominoes one after the other eventually including the worlds reserve currency holder, the United States.

Meanwhile the Eurozone rescue summit of barely a week ago looks as though it is already in serious trouble with many countries now having second thoughts such as Sweden, Czech Republic and Hungary, as they realise that they don't want to be put under German Bundesbank control, so instead of Britain being against the 26, the reality is that it is more like 21 against 6 and by March 2012 at best 17 against 10 with chances that ultimately even France itself will not be able to stomach being dictated to on its tax and spending from Berlin, so my last Friday's hopes that the muddle through summit would buy some time for the bankrupt eurozone banking system into mid January 2012, is now starting to look not so safe a bet in which respect its back to building and maintaining those firewall's against the bankrupt banks that are literally teetering on the brink of collapse as evidenced by freezing up of the interbank LIBOR market.

Protect Your Bank Deposits from the Bankrupt Banks NOW!

Yes, if you have not already done so then you really do need to protect your deposits against the bankrupt banks, because as I warned of right BEFORE Lehman's went bust in 2008 and continuing into 2011, the bankrupt banks are sitting on monumental contagion risks courtesy of their off balance sheet derivatives positions that have grown from $500 trillion in 2008 to over $1.5 quadrillion today! These bankrupt banks have tripled the risk over the past 3 years! This is clear evidence of a ponzi scheme that continuously requires expansion to prevent implosion that is becoming inherently more unstable over the passage of time.

Which is why I am going to repeat for the nth time, take a serious hard look at where your cash is deposited because if you do not then it could disappear in a puff of smoke MF Global style. You need to protect your deposits now by moving them out of the Eurozone and into too big to fail UK banks and then stick to the FSCS compensation limits, at least in the case of financial catastrophe this will buy you some time, maybe not a lot because Britain is at the heart of the global derivatives off balance sheet ponzi scheme. More here - 03 Dec 2011 - How to Protect Your Bank Deposits, Savings From Euro-zone Collapse Financial Armageddon

Off course you should be eyeing moving your funds out of all banks because after tax your destined to lose a good 3% per year of your deposited funds value anyway. In this respect you do have to take on a little risk, but given that the funds on deposit at the banks are at risk anyway you can protect against the inflation mega-trend for instance by buying corporate bonds, for example Tesco's very recent offering of 2019 RPI Index linked Corporate Bonds that Pays RPI +1% (also indexed), which if held to maturity protects you against inflation with very little risk, also if purchased in an ISA the interest is tax free, and being a corporate bond is traded on the secondary market (can be bought and sold at any time via your stock broker).

Those that say hyperinflation cannot happen do not understand the consequences of the ticking derivatives ponzi time bomb, if it were to explode and it could as consequence of bank contagion risk from something such as one of the PIIGS defaulting, the resulting panic would ignite Central Bank QE on an epic inflationary scale as that is the only answer they would have to settle the derivatives contracts to prevent total financial and economic collapse.

The bottom line is this you need to first create a firewall between yourselves and all aspects of the bankrupt banking system, and then against fiat currency because no matter what the official inflation statistics state, you already KNOW that the money in your pocket is losing value fast, at perhaps as much as 15% per annum in terms of what you actually need to buy to feed, clothe and warm yourselves.

Source and Comments: http://www.marketoracle.co.uk/Article32155.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2011 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of three ebook's - The Inflation Mega-Trend; The Interest Rate Mega-Trend and The Stocks Stealth Bull Market Update 2011 that can be downloaded for Free.

Stocks Stealth Bull Market Ebook DownloadThe Interest Rate Mega-Trend Ebook DownloadThe Inflation Mega-Trend Ebook Download

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

shyam
16 Dec 11, 13:05
change in outlook for stock market?

Hi Nadeem,

>so my last Friday's hopes that the muddle through summit >would buy some time for the bankrupt eurozone banking >system into mid January 2012, is now starting to look not >so safe a bet

Does this change your recent outlook for stock market that it will cotinue to rise towards year end?

Thanks,

Shyam


Nadeem_Walayat
16 Dec 11, 14:47
Eurozone Sledge Hammer

Hi

The stock market wants to rise but keeps getting hit by eurozone sledge hammers.

It is not clear but I am sticking with my overall view depsite increased risks to the downside, because my opinion remains that the US economy is actually stronger than it looks which means corporate earnings should come in higher than expected, which should be reflected in a rising trend for US stocks.

I want to know where the market closes towards year end which will give me a good clue as to where it will go during 2012, so am holding off on comments for 2012 until then.

Best

NW


Julian
18 Dec 11, 12:57
The risk of non-bank financial institutions

Hi Nadeem,

In your aticles you are recommeding getting out of banks and investing in (shorting) government bonds for example.

Are the financial institutions that offer these services not facing the same risk of financial meltdown as the banks?

All the best

Julian


Nadeem_Walayat
18 Dec 11, 21:08
Risk

Yes they are, there is no escaping risk, all one can do is to reduce the risk i.e. have less money on account.


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