With still no deal on the EFSF worked out between France and Germany, MR. Market senses that Mrs. Merkel is not going to buckle to M. Sarkozy’s pleas to allow the EFSF to become a bank and save the French governments from having to bailout its banks. If France must recapitalize its banks, odds are very high it will lose its AAA rating.
The market is pricing in that eventuality by selling French bonds and buying Germany. That has pushed spreads to a euro-era (error?) wide of 120 bp.
EUR/USD is consolidating at 1.3850-ish.
