Euro fears linger as France stands firm

Speculation was mounting over the future of the eurozone last night amid calls for Spain to seek a bailout and concern that France will be the next major economy to find itself under stress.

However delegates at the IMF annual meeting sought to strike a more positive note about the future of the eurozone, even as doubts pervaded both the official debates and the informal chatter on the hallways.

Some market participants have suggested that the next target of speculators in the markets could be France.

Harvard university professor Kenneth Rogoff, the US economics professor tipped for the Nobel economics prize announced next week, told Emerging Markets in a telephone interview that despite virtually everyone pointing their finger at Germany as the villain who holding back from solving the eurozone crisis, they should look at France too.

“The French seem to believe that if just Germany would use its resources to guarantee everyone – potentially France as well – there’s no need for bigger changes,” Rogoff said.

French finance minister Pierre Moscovici dismissed market speculation, a denial backed the low yields on its debt. “No one I met here [in Tokyo] has such a feeling,” he said. “France is still a reliable asset. We are doing what we have to do.”

“Markets reacted positively after the budget was announced two weeks ago,” Moscovici said, adding that debt reduction was an “imperative necessity.”

Meanwhile Jacob Frenkel, chairman of JP Morgan Chase International, told Emerging Markets that Spain should apply for money from the eurozone’s permanent bailout fund – the ESM, which entered into force earlier this week – as soon as possible.

“They should use it. It’s there, it’s available and would be helpful to the adjustment,” said Frankel, who is a former Israeli central bank governor.

Luis de Guindos, Spanish economy and competitiveness minister, told journalists that pressure on his country had eased during the meetings. “It’s curious - and I have contradictory feelings about the way things have gone – but the pressure of the IMF has been reduced and the atmosphere has got much more sanguine, more positive [than during the Spring Meetings].

“The monetary stance of the central banks has got much more accommodating,” giving Spain some breathing room, while with the help of the IMF’s more accommodating position, “the perception is more stable than three or four days ago,” he said.

Despite a downgrade of Spain by rating agencies earlier in the week to just above non-investment grade, Spanish bonds’ yields remained below the 6% level which is considered by markets as unsustainable over the long term. Ten-year bond yields fell 7 basis points to 5.71% on Friday.

IMF managing director Christine Lagarde said during the meetings that austerity should be “a marathon, not a sprint,” a statement seen as an indication the IMF was going to be more lenient in its talks with Greece, as well.

European Central Bank governor Mario Draghi said the economic situation in the eurozone remained challenging, but improved from six months ago”.

The jury is still out on whether Greece will be able to pull through, with policymakers expressing support but market participants doubting that the country will be able to stay in the eurozone.

“This is not just about the fact that, for the last three years, virtually every objective of the Greek programs has been missed,” Mohamed El-Erian, the CEO of Pimco, told Emerging Markets. “It is also about a population that feels that it has endured tremendous pain for no gain, either immediate or prospective.”

“As such, the population is nearing the point of exhaustion and complete rejection – economic, financial, political and social – that renders orderly policy solutions very hard to sustain.”

Willem Buiter, chief economist at Citigroup, said he considered it was “highly and regrettably likely” that Greece would not be a future member of the euro. “[This is] not because European politicians want [the country to leave] but because Greece’s leaders cannot keep it in.”