France is in More Trouble Than Italy

France Debt ‘Significantly Overvalued,’ General Re Says – Bloomberg.

France Government Budget

Italy Government Budget

The markets work in a peculiar fashion. Germany is considered a safe haven for its strong economy and budget situation  France is also considered a safe haven, but I do understand why. Let’s compare France to the strongest of the PIIGS, my ancestral homeland Italy.

The yield on the French 10 year bond is just under 2.1%, while Italy’s is at 5.7%, but I do not see the reason for such a large spread between the debt yields of these nations. Here are the numbers. Judge for yourself.

The last time France had a lower budget deficit than Italy was 2007. For 2012 Italy’s budget deficit will be 25% lower than France’s as a percentage of GDP. Italy’s unemployment rate of 10.8% is a smidgen higher than France’s 10%. Since 2008, Italy’s government debt has grown 16%, but France’s has increased over twice that rate at 35%.

Currently, Italy’s government debt stands at 120% of GDP versus France’s 86%, but Italy has a trade surplus and most of its debt is domestically held. These factors allow it to finance a large debt than France.

I’m not saying that you should run out and buy Italian bonds, but I am telling you to avoid the French ones. Eventually, they will behave more like PIIGS issues than Teutonic ones.

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