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Credit Ratings Downgraded France Regrets Abusing Britain as it May Beg for UK Bailout Cash

Interest-Rates / Eurozone Debt Crisis Jan 14, 2012 - 04:43 PM GMT

By: Nadeem_Walayat

Interest-Rates

Best Financial Markets Analysis ArticleNine Euro-zone countries have been downgraded by U.S. credit ratings agency S&P, most of whom to junk status with the biggest hit to the Eurozone being the downgrade of France from AAA to AA which has resulted in a political storm in France as President Sarkozy's hopes of being re-elected in April 2012 have now gone up in smoke.


During December France had gone on the offensive against Britain when the ratings agencies began threatening a downgrade of French government debt as a consequence of French banks exposure to bankrupting PIIGS debt.

Head of French Central Bank, 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”.

Now after the downgrade, French bond yields are expected to rise to at least twice that of Britains over the next few weeks with Britain paying a record low 1.9% (10 year bonds) against France's financing costs expected to rise to at least 3.6% as it marches eventually to where Italy is today (over 6%).

Whilst the debt fundamentals on face value may appear very similar for Britain and France, i.e. both have similar deficits, total public debts and poor growth rates, however the fundamental difference is that Britain retains its own currency which allows it to print money and monetize debt as and when required, which it has already done so to the tune of £275 billion to date (inflating debt away is a primary driver of the UK's Inflation Mega-trend) which makes an outright default infinitely less likely than for France which cannot print money and inflate its debt away but instead is forced to cut spending and deflate its economy that risks a debt deleveraging deflationary death spiral. France's position is no different to that which is being experienced by the likes of Portugal, Spain, Ireland, Italy and off course Greece that is increasingly on its last legs of what the population are prepared to suffer so as to protect the central and private bankster's and therefore should not be imminently prepared to trigger an outright debt default.

Meanwhile the German politicians are now repeating what the French were saying a month ago that Britain should also be downgraded : Deputy Leader of Germany's Christian Democrats states " The ratings agencies decision was out of order and it should downgrade Britain to be consistent"

Perhaps this is a sign that the euro-zone debt crisis a month from now will come knocking on Germany's doors as they too will see a downgrade and debt financing costs soar.

Meanwhile French government politicians are down playing the downgrade by reminding the public that the US has also been downgraded from AAA to AA without any financing consequences. However, France is not the United States, which has the advantage if having the worlds reserve currency and most liquid bond markets, and off course like Britain can print money to buy its own debt, therefore an outright default is infinitely less probable regardless of its credit rating being the same as Frances.

The real problem with the French downgrade is that the rising financing costs are not just a problem for France and Germany but for the whole euro-zone for it is France and Germany to a greater extent who's credit ratings are being relied upon to finance the EFSF bailout fund for the bankrupting PIIGS. Which means if they too require help from the likes of lower interest rate financing economies such as the UK and USA then the Euro-zone crisis is set to escalate to a level that is several magnitudes higher than where it was barely a month ago when I last warned that depositors should seek to protect their deposits from the bankrupt Banks.

There is a fundamental flaw at the heart of the Euro-zone that unless it too starts to monetize debt on the similar scale if not larger than that which Britain and the US have been engaged in then it will BLOW UP, which my next in depth analysis will cover in depth (ensure you are subscribed to my always free newsletter to get this in your email in box).

Whilst the people in Britain may smugly look on at France and the bankrupting Euro-zone, know this that if the Euro-zone blows up then the UK will also go down with it, whilst Britain's official debt is estimated at about £1.1 trillion, real debt and liabilities are far higher at an estimated £10 trillion, which is more than enough to bankrupt Britain. So do not be fooled by statements from smug UK politicians such as Osbourne and Cameron for the truth is they have cut nothing, government spending continues to expand and the deficit remains with debt instead of being paid down continues to accumulate at the rate of at least £120 billion a year. Even if the euro-zone survives, it is only a matter of time when the day of reckoning comes knocking on the UK's doors. My next in-depth analysis will give you a 2-3 year head start what is likely to happen, again subscribe (FREE) to receive this in your email in box.

So, 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/Article32630.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2012 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

Jim
15 Jan 12, 14:07
Firewall?

Nadeem,

Thanks for the heads up.

Would you classify owning high dividend and commodity stocks as a firewall too, or would paper assets such as shares crash in the early stages of hyperinflation also?

Other than corporate bonds, what would you advocate as a firewall?

Thanks

Jim


Darren
16 Jan 12, 05:48
Collapse

Yes, Naddeem, I too would be interested to learn your thoughts on which paper investments are best with the coming very high inflation/hyperinflation.

During the Weimar Republic, stocks and shares did terribly at the beginning of the hyperinflation. It was only during the last stages of this terrible period that shares out performed.

Are you suggesting paper shares are a hedge (a firewall) against bank failures and hyperinflation?

Would appreciate your thoughts.

Darren


Nadeem_Walayat
16 Jan 12, 16:48
Hypo Inflation

Hi

I will aim to get the article out over the next few days.

We are in a different world to the 1920's Weimar, where the impact is global rather than local.

And yes, I have been suggesting for the past 2 years that dividend paying Shares are a hedge against inflation AND hyperinflation.

But more, much more in my pending article,

Best

NW


Darren
17 Jan 12, 04:41
New highs or further sell off?

Thanks Nadeem for commenting.

I see now that indeed you have been recommending high dividend paying shares and it seems obvious now that this is a global issue with most western central banks printing money.

As stock markets are on the verge of making new highs, do you think now is a good time to be buying stocks, or is another correction due in the short term?

Many, many thanks for commenting.

Yours,

Darren


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