One indebted country has pushed through unprecedented austerity measures and persuaded Europe to shore up its banks. The other has done very little and is about to roll back even some of that.
Which one is paying near 0 percent on its debt?
Spanish Prime Minister Mariano Rajoy must be wondering what he needs to do to get his country’s borrowing costs down from levels that, over time, will bankrupt it.
Just to the north, French President Francois Hollande, whose country is financially in only slightly better shape, could be forgiven for thinking financial markets were mistaking France for Germany.
No matter what policy steps eurozone countries are taking — individually or as a whole — the gap between the economies in the north and those in the south are growing wider, the opposite of what European leaders are trying to achieve.
“Investors are drawing a dividing line along the Alps and the Pyrenees,” Rabobank rate strategist Richard McGuire said about the paradox of two debtors being treated as if they belonged to different worlds.
With 10-year borrowing costs of about 7 percent, Spain may soon be forced out of capital markets. France, on the other hand, looks like one of the world’s safest debt markets with its debt costs 500 basis points lower.
On Thursday last week, investors even got to the point of paying what amounts to a parking fee — a negative yield — on short-term French debt.
This contrasts with the picture in November last year when France was seen as the next weakest link in the eurozone after Spain and Italy and the spread, or difference, between French and Spanish 10-year yields was about half what it is now.
There are a multitude of reasons for this unequal treatment on bond markets — France’s slightly stronger economy, its history of being close to Germany politically and recent moves by the European Central Bank (ECB).
However, for the moment and perhaps unwarranted, France is basking in the eurozone’s core and Spain is being hung out to dry.
There is an awkward feeling about the flows into French bonds, though. Investors’ view that France is the weakest of the so-called “core” group of the eurozone has not changed.
France has plenty of things to put investors off. A stubbornly high budget deficit, a flagging economy, still strong financial ties with Italy and Spain and inflexible labor markets are only a few.
While Hollande has managed to keep this year’s budget deficit target of 4.5 percent of economic output on track by raising taxes on the rich, he is yet to deliver the deep structural reforms that markets were pushing for in November.
While most countries in the eurozone are lifting the retirement age, he has cut it. However, he still needs to find a massive 33 billion euros (US$40.124 billion) worth of savings for next year.
That none of this is weighing much on French bonds is mainly because investors are being driven to find yield, or return for their money, wherever they can.
Germany — the bloc’s last domino — has little room to accommodate more money in its debt markets, so many investors are simply forced to ignore France’s shortcomings and boldly expand the area where they choose to deploy their cash.
“France is not doing great in terms of budget deficit progress and other reforms, but you need at least some yield and German paper is not going to do the trick,” Commerzbank rate strategist David Schnautz said. “Buying France is the lesser of two evils.”