French government debt more expensive than corporate debt

Normally government bond risk is priced very cheaply because this is the most solid and reliable asset class. But not in France today as our friend Eric Fry from the Daily Reckoning writes:

‘The price disparity between European corporate CDS and French Government CDS has disappeared completely. In fact, it has inverted. Investors now consider a default by the French government to be more likely than a default by the average European corporation.

‘This price trend does not suggest that a default by the French government is probable. In fact, such an eventuality seems highly unlikely. But the price trend of French CDS relative to corporate CDS, does suggest that a new phase of the credit crisis is underway.’

You can see this most clearly in the chart below. Note how back in the 2008-9 global financial crisis French bonds remained much more highly rated than corporate debt. That is just not so today which underlines how different the current eurozone financial crisis is from three years ago.

In 2008-9 sovereign debt was not an issue, today it is the only issue. Greek two-year bonds pay 52.3 per cent, check that against the 0.2 per cent yield on US treasuries – now at a record low yield as Europeans have been moving out of euros and into dollar-denominated bonds.

We agreed with Mr. Fry’s conclusion: ‘As this sovereign default cycle unfolds, government bond yields are likely to climb, economic activity is likely to slow and paper currencies are likely to depreciate relative to gold and other hard assets. That’s the bad news. The good news is that post-default nations will emerge leaner and meaner and ready to initiate a new era of economic growth.’

So bond holders will be squeezed, interest rates will rise which is bad for real estate and stocks will suffer from the ensuing recession. Then when everything is reset to zero the growth cycle can start again.

It does not sound like a joyride except for the holders of gold and silver!