Euro slides near 17-month low as French debt fears persist

Moulin's warning ^[4] hits a euro budget in two places: the exchange rate and the cost of borrowing. The exchange-rate cost is already here. The euro is down more than 4% this year ^[2], so a bill set in dollars costs roughly 4.2% more in euros than it did in January ^[14].

Borrowing costs move with the spread, which is the extra rate France pays over Germany to borrow for 10 years ^[9]. Mohit Kumar, chief European economist at Jefferies, said French bond spreads had tightened in the last two sessions, falling from an intraday high of over 150 basis points to 136bp, and that Jefferies did not think this was a sovereign crisis ^[10]. That is a fall of more than 14 basis points in two sessions ^[15].

Kumar's concern starts at 150bp, the level the spread has just dropped below. "Our fear is that as spreads move above 150bp, we could see some contagion risks not just to other French names, but also onto European peripherals," he said ^[11]. In his view, a move back above that level would spread the risk to other French issuers and to the weaker eurozone economies on the edge of the bloc ^[11].

A skeptic would say part of the euro's fall is about the dollar, and the evidence allows for that. US 10-year and 30-year Treasury yields hit fresh 24-year highs overnight ^[13], and the euro-dollar rate moves when either currency does. The Guardian's report blames the euro's weakness on French debt fears and political uncertainty across Europe ^[3]. It does not say how much of the fall comes from each side. I think France accounts for a real part of it. Kumar also sees deficit worries outside the euro: "Market is going after the weakest link in the deficit picture which is France and the UK," he said ^[12].

This week's moves are small next to the decision Moulin is pointing to. The euro fell 0.13% on the day ^[1]. He named one step that would reassure markets: "France is not Greece during the eurozone crisis. If it can pass a budget this year to reduce spending and narrow the deficit as the government has proposed, then markets will be reassured by this concrete step of fiscal consolidation," he told the Financial Times ^[6]. The government has to pass those cuts with a presidential election due next year and protests already under way ^[8].

The trade-off this quarter is about timing, and it decides next quarter's costs. A company that buys dollars and hedges now locks in a euro near a 17-month low ^[1]. A French borrower that fixes its rate now locks in a spread of 136bp ^[10]. Both lose out on the recovery Moulin expects if the budget passes. Waiting keeps that chance open but leaves the budget exposed to what he said happens if France does nothing: "If we don't act, there is indeed a risk of being gradually strangled by rising interest rates. We have to remain masters of our own destiny," he said ^[7].