Tuesday 8 October 2013

Chart of the Day - France in Limbo

"In the theology of the Catholic Church, Limbo (Latin limbus, edge or boundary, referring to the "edge" of Hell) is a speculative idea about the afterlife condition of those who die in Original Sin without being assigned to the Hell of the Damned" - source Wikipedia

Looking at France's gradual economic decline, from the core, towards the periphery, we thought the term "Limbo" would be appropriate if one looks simply at the Taylor rule, as indicated by the below graph  from Thomson Reuters Datastream / Fathom Consulting:
"Our Taylor rule analysis suggests that the German economy might actually benefit from tighter money. But the French economy needs a monetary loosening. Higher interest rates stemming from tapering could be profoundly damaging for the French corporate sector." - source Fathom Consulting

On top of that, French corporate margins are at a 25 years low, making them acutely vulnerable should the Fed proceed with its "tapering", also indicated in the below graph from Thomson Reuters Datastream / Fathom Consulting:
"The nexus between French banks and unprofitable NFCs represents the vulnerable underbelly of the Euro Area. The impact of Fed tapering could expose that. Should that risk materialise, we envisage significant implications for French assets." - source Fathom Consulting

While the CAC 40 is highly diversified and more and more loosely correlated to the activity within France, the latest willingness of the government to raise corporate tax to around 38% makes us see France as the new barometer for Euro Risk as a whole. Serious structural reforms have yet to be implemented.

"It is the end. But of what? The end of France? No. The end of kings? Yes."
Victor Hugo

Stay tuned!

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