France’s Pre-Louis XIV Government System Caps Debt Cost Amid Euro Turmoil

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http://www.bloomberg.com/news/2011-09-26/france-s-pre-louis-xiv-government-system-caps-debt-cost-amid-euro-turmoil.html

France is paying less to borrow now than at the start of the year, aided by a political consensus on deficit reduction and a centralized system of government dating back before Louis XIV’s reign.

As investors seek shelter from the political and debt turmoil in markets such as Greece and Italy, yields on 10-year French government bonds have fallen to 2.6 percent, down from 3.4 percent at the beginning of January and less than half the post-euro-creation high of 5.76 percent on Jan. 18, 2000.

“For centuries the French state has been a predatory one,” said Michel Martinez, an economist at Societe Generale SA in Paris. “It’s not a country where there is implementation risk. When the government decides to do something, it happens.”

A slowing economy and concern about French financial firms’ debt holdings -- the biggest exposure to Europe’s troubled economies -- have raised the yield premium France pays over Germany and caused its debt service cost to surpass the U.K.’s this year. Yet with only six euro states retaining AAA credit ratings, alternatives are limited for investors, suggesting the euro area’s second-largest economy can continue to benefit from costs of credit that are among the world’s lowest.