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France Snared In Debt Crisis Crossfire


It's MORNING EDITION, from NPR News. I'm Steve Inskeep.


And I'm Renee Montagne.

Just to review the week we're all living through, Standard & Poor's downgraded U.S. government debt, and markets dived around the world.

INSKEEP: The Federal Reserve made a reassuring move, and global markets briefly soared.

MONTAGNE: Then new rumors about debt in Europe sent markets plunging again. So far today, the picture is mixed.

INSKEEP: Let's talk through those rumors in Europe - or specifically France -with Jonathan Loynes, chief European economist at Capital Economics in London. Welcome to the program.

Mr. JONATHAN LOYNES (Chief European Economist, Capital Economics): Thank you.

INSKEEP: The rumor, I should say, is that French government debt would have its rating downgraded the way that U.S. government debt did. What was the source of that rumor?

Mr. LOYNES: I think people looked at the U.S. debt downgrade, and then quite naturally looked around at other developed economies still hanging on to a AAA credit rating and wondered which one would be next. There have been sort of concerns about France, I think, for some time. It has a high level of debt. It's got a pretty significant budget deficit. It's public finances are actually not that much better than a number of the more troubled eurozone economies who have been obviously the source of a lot tight market turmoil over recent months. So France was perhaps one of the obvious targets for markets.

INSKEEP: Well, given that the ratings agencies has said France still has the top rating and that the French government insists they're going to keep it, is there serious reason to be concerned here?

Mr. LOYNES: I think there's still a reason to be concerned, and we know how quickly things move. So the fact that credit rating agencies have reaffirmed France's rating now, I think, doesn't necessarily mean that its problems are over. There's another side to this, as well, though, which is that, you know, aside from France's own problems, there are concerns, of course, about what would happen to the eurozone as a whole if a country like France - which is obviously a very important and integral part of what has been perceived to be the core of the eurozone - runs into serious problems.

I mean, aside from the general effects of that, there would be potentially quite adverse effects on the policymakers' firepower to deal with the more troubled economies like Greece, Ireland, Italy and Spain because France may not be able to contribute any longer to the bailout facilities and to other measures such as the sort of - the bond purchases which are expected to be a, you know, a major part of the policy solution over the coming months. So...

INSKEEP: Right. French banks hold a lot of that Greek debt, don't they?

Mr. LOYNES: Yes. And there's those general concerns about the state of the French banking system. French banks, as you say, are quite vulnerable to Greek debt and other peripheral economy's debt and, of course, would suffer if France itself was downgraded.

INSKEEP: I want to ask another thing, though, Mr. Loynes. I mean, I grant the amount of dismal news that has come out in the last several days, and yet the debt situations of various governments has been known, the general economic weakness has been known, although it's become sharper and clearer in recent weeks. And the way the market has been going up by hundreds of points and then down by hundreds of points and then up by hundreds of points and then down again, to outsiders, this can feel deeply, deeply irrational. It's just hard to believe that the value of the world could change that much in a day. Is something rational going on here?

Mr. LOYNES: Well, I don't think you can explain the market volatility and the swings that we've seen in markets. If you say, you know, 5 percent upwards one day, the same down the next day, you can't explain those in terms of changes in the underlying economic outlook. I mean, you know, that outlook is not changing that dramatically from day to day. But I think this is the nature of financial markets, isn't it? You know, there's an enormous amount of uncertainty, sentiment is extremely important. Psychology is extremely important. Herd behavior we know plays an important role, as well. So I don't think it's too surprising in these sorts of circumstances that we are seeing that sort of volatility.

But I think, you know, the underlying picture is a reasonably steady one. There have been sort of growing concerns about the outlook for the eurozone over a long period of time. We ourselves as forecasters have been warning that the debt crisis in the region would continue to escalate, that it would spread out to the smaller economies and into the bigger economies, and that ultimately this would pose a threat to the future of the single-currency union. So I think, you know, we haven't been surprised by that underlying trend.

INSKEEP: In a couple of seconds, do you feel like the market is near its bottom at this point?

Mr. LOYNES: No I don't. No. I think there's plenty of scope to the debt crisis - in Europe, at least - to continue to escalate and for fears of, you know, towards the future of the single-currency in itself to escalate, as well. So, no. I would be very hesitant to suggest that the market is near the bottom.

INSKEEP: Okay. Thanks very much. That's Jonathan Loynes of Capital Economics in London. Transcript provided by NPR, Copyright NPR.