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France Keeps a Watchful Eye on Turmoil in Italy

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First it was Athens. Then Rome. Could Paris be next?

While Italy has replaced Greece as the focus of anxiety amid Europe’s worsening debt crisis, investors are increasingly concerned about the outlook for France, whose banks are among the world’s biggest and are closely linked with their counterparts in the United States.

One crucial gauge of investor sentiment, the difference between what France pays to borrow versus what Germany pays, has doubled since the beginning of October, and last week reached its widest point since the formation of the euro currency zone in 1999. Meanwhile, speculation that France could soon lose the sterling triple-A rating on its sovereign debt intensified after Standard & Poor’s mistakenly told clients on Thursday that it was downgrading France’s debt.

The jump in Italian bond yields to more than 7 percent last week, on concern about Rome’s ability to borrow, reminded investors just how much Italian debt French banks hold.

But French banks also hold a lot of French government bonds, whose yields have risen in tandem with concerns that Paris’s finances may be strained as it foots a larger bill to help prevent the crisis from engulfing Italy.

“Once you are dealing with Italy, you are dealing with France as well,” said Hans Mikkelsen, senior credit strategist at Bank of America Merrill Lynch. “This is cutting into the core.”

For the moment, the ascent of a new interim government in Rome and the appointment of Mario Monti, a former European commissioner, as prime minister, have calmed those fears.


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