France and Italy Sovereign Risks vs. Returns: La Dolce Vita and Joie de Vivre

Meeting date:
November 29th, 2012
Start time:
09:00 AM EST
1 Hour


Please join us on Thursday, November 29, at 9 a.m. ET/2 p.m. GMT, when the RGE Macro Strategy and Country Insights Teams will discuss our long-standing, high-conviction view that sovereign spreads and credit ratings far understate France’s risk, while they fail to reflect Italy’s relative strength in an environment of eurozone (EZ) distress or dissolution.
  • Even after the Moody’s downgrade, France’s average credit rating (AA+) is still six notches higher than Italy’s (BBB+). We do not think that this difference is justified, and expect convergence, primarily driven by significant further downward movement in France’s credit rating. We expect similar widening in French yields.
  • While other commentators have focused on competitiveness and the fiscal position, they fail to fully reflect the national balance-sheet implications of France’s combination of structural rigidities, high public and external debt, and universal banks with significant international financing needs.
  • The EZ outlook has different implications for each member country. While France appears particularly weak in a scenario of EZ dissolution, Italy appears particularly strong because of its lower external vulnerability, less sophisticated banking system and recent reforms that have actually reduced structural labor market rigidities.
  • We discuss how to tactically and strategically exploit the conflict between the consensus outlook/market pricing and RGE views.

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