The Short-Term Impact of EFSF 3.0 on France

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Country Insights has analysed the short-term impact of EFSF 3.0 on the French economy using its unique Quantitative Country Analytics (QCA) model of sovereign risk and strength. Its analysis has produced some significant conclusions.

While the ongoing discussion on the future structure of EFSF makes markets wary of its impact on France -  the second largest contributor to the EFSF and a country whose banking sector is significantly exposed to the sovereign debt of the Eurozone periphery – we are concerned that markets and the credit rating agencies do not yet fully appreciate the current weakness of the French economy and the impact a coordinated rescue plan led by France and Germany could have on it.

At the same time, investors are struggling to value the debt of all Eurozone countries in the context of a worsening EU-wide debt crisis. The task is complicated by the uncertainty around the impact of the EFSF on the credibility of EU-wide fiscal policy and on individual members’ economic fundamentals and credit ratings. It becomes increasingly clear that the current size of the EFSF is insufficient to calm markets and increasing the size by more direct contributions from EU sovereigns seems to face too much domestic opposition. Eurozone policymakers are therefore debating the possibility of leveraging the assets of the facility (also referred to as EFSF 3.0) either through borrowing (either actual or in contingent liabilities) or by turning it into a bank that would have access to ECB liquidity. The former transfers the risk to the sovereigns’ balance sheet, the latter transfers the risk explicitly on ECB’s balance sheet, which eventually will rest with member states through their contributions to the ECB. We have chosen the former as one challenging scenario to illustrate the impact of EFSF 3.0 on France’s economic fundamentals. In addition, there is discussion of using the existing facility to guarantee the first loss on certain government debt; we do not include the scenario in this note, but are very happy to provide our analytical results upon request.

The resilience of the French economy is measured against a benchmark of several eurozone countries, both core and peripheral, and a number of non-EU countries.


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