Bradley Jon Eaglefeather

Most people don’t yet grasp what is happening in France. Markets are pricing French sovereign debt as junk, rating agencies will eventually have to follow. This will have two major impacts: 1. Most French banks are already rated at or just below the sovereign, so a move toward junk would likely drag domestically focused lenders with it. Credit to households and firms would slow sharply, hurting the economy and widening the fiscal deficit even further, a vicious cycle. 2. For the ECB, the constraint is legal as well as financial. A fall below investment grade would force sales by ratings-bound investors while making any backstop harder to justify under current rules. The next euro crisis will begin in France. The first, which began in Greece, will feel like a walk in the park compared with what comes next.