European Crisis Live: Investors Ignore French Rating Cut as Euro Spikes Higher

• European stocks weaker, bunds firmer as investors play defence
• Eurogroup meeting may lift sentiment if definitive deal can be reached on Greece
• French bond market reaction to Moody's downgrade muted for the moment

1450 BST: Gentle reminder

Societe Generale's global head of economics, Michala Marcussen, on the French downgrade:

" .... A gentle reminder of the need for France topursue fiscal austerity and structural reforms. Our view is that the French government has recently sent positive signals on public finance commitments and competiveness. However, more is required. Given the overoptimistic growth assumption, we believe that a supplementary bill will be needed this winter to meet the 2013 fiscal target at 3.0% of GDP.

Equally, the government has planned big spending cuts from 2014 onwards that still need to be specified. Finally, the government has set up several stages of reflection and negotiation between social partners on the labour market and pension reforms and expects conclusions before spring 2013.

The risk is that these negotiations flounder and further reforms and cuts in spending are likely to prove more politically challenging than the recently positive initiatives. Their implementation will depend on how public opinion responds."

1435 BST: There's more than one veto

Italy has threatened to play the "V" card in this week's EU budget negotiations, according to Italian press reports, quoting European Affairs Minister Enzo Moavero, if the negotiated seven-year spending plan is "burdensome" to his compatriots' taxes.

1350 BST: Headlines ..

It's no exaggeration to suggestion European market reaction could, do some degree, have been muted by the day's titanic "off market" newsflow. We've had the bombshell of serious criminal charges being prepared against former News Corp executives Rebekah Brooks and Andy Coulson (the latter served as UK Prime Minister David Cameron's press secretary), a fraud conviction linked to the biggest financial scandal in British history and a muli-billion writedown linked to detailed allegations of deception linked to the takeover of one of Britain's most successful tech companies.

Wow!

1340 BST: US Housing Starts

Some ammunition for the bulls prior to the opening of US equity markets as the Commerce Department reports building broke ground on new houses at the fastest pace in more than four years last month. Housing starts jumped 3.6 percent to an 894,000 unit pace, the report said, as Superstorm Sandy seemed to have little impact on the new construction.

1310 GMT: Qatar Visit

Greece's Prime Minister, Antonis Samaras, is planning a visit to Qatar in an effort to attract investment into the debt-ravaged economy. Greece's parliament voted last week to speed up the sale of state-owned assets as part of its new €14bn austerity programme it hopes will appease its international creditors. Qatar's sovereign wealth fund is one of the largest in the world and owns stakes in Barclays, Volkswagen and Credit Suisse.

1245 GMT: Bond sale delay

The triple-A rated European Financial Stability Fund (EFSF) has delayed its planned 3 year bond sale after last night's downgrade of France by Moody's. Lead-arranging banks had only just been appointed for the deal (JP Morgan, Morgan Stanely and Natixis) but no formal indication of size had been made even though reports had suggested the Fund was looking to raise around €3bn.

France is the second-largest contributor to the permanent bailout fund with a 21.83 percent commitment. Germany is the single-largest provider of capital at 29.07 percent.

1145 GMT: Rogue Trader Conviction

Former UBS trader Kewku Adoboli - alleged to have lost more than £2.3bn in the biggest indicvidual financial scandal in British history - has been found guilty of one count of fraud at London's Southwark Crown Court after an 11-person jury had deliberated for more than five days. Adoboli, 32, had worked on the bank's Exchange Traded Funds desk and denied the charges. He had testified that managers had pressured him to take unauthorized risks in a relentless effort to generate profits for the bank.

1120 GMT: Moody's Blues?

The single currency is trading at a three-week high of $1.2820 against the US dollar.

1045 GMT: Solid Gilt Auction

Once again, bond markets seem rather unfazed by either the French downgrade or the growing assumption that Britain's coveted Triple-A rating might be next on the Moody's chopping block. The UK's Debt Management Office, which arranges bond sales for the Treasury, sold around £4.5bn in five-year Gilts this morning at a yield firmly under 0.8 precent - extraordinarly cheap funding for an economy on the tip of a triple-dip recession. Investors bid for £1.59 for every £1 of debt put up for auction, meaning total bids of more than £7.1bn were placed for securities that have, in effect, no return whatsoever after adjusting for inflation.

1030 GMT: Stocks in the red

Germany's benchmark DAX has dipped into the red for the session, taking the last major European index out of positive territory for the day. Thus far, the moves haven't been that dramatic - the biggest decliner so far is the FTSE MIB, which has given back around 1 percent - but the pace could accelerate if weak US housing data or headline risk from the on going conflict in Gaza pressures US stocks at the open.

Britain's FTSE 100 is down around 0.3 percent at 5,722.25 while the FTSE Eurofirst 300 has slipped around 2.93 ticks (0.27 percent) to 1,088.56.

1015 GMT: French bank impact

Moody's last downgraded France's largest banks in June as part of its global review of financial sector ratings. All four (BNP Paribas, Societe Generale, Credit Agricole and BPCE) have A2 ratings at the present time. RBS analysts Jorge Mayo and Georgios Banos don't think the one-notch change to France's debt rating will trickle down as a result:

"In our view, the sovereign downgrade will not directly translate into a bank downgrade. The ratings differential to the sovereign stands at 4 notches, whilst the ability of the French sovereign to support its banks remains substantial as denoted by the high Aa1 credit rating. Nevertheless, a number of the arguments used to support the sovereign downgrade decision could potentially provide ammunition for a review of bank ratings, namely the uncertainty around domestic economic prospects and exposure to potential euro area shocks. All French banks have large domestic market exposures (particularly Credit Agricole and BPCE) but are also European centric (most noticeably BNP). As a result and given the fairly benign credit rating levels of French banks, a potential revision of outlook to negative or a one notch downgrade is not completely off the cards in our view."

0955 GMT: Chaise Musique?

Some mirth in the French press this mornning for one of the drivers to last night's downgrade by Moody's. The agency cited France's financial committments to various Eurozone rescue funds (European Financial Stablity Fund and European Stablity Mechanism) as one of its concerns:

"Moreover, France's credit exposure to the euro area debt crisis has been growing due to the increased amount of euro area resources that may be made available to support troubled sovereigns and banks through the European Financial Stability Facility (EFSF), the European Stability Mechanism (ESM) and the facilities put in place by the European Central Bank (ECB). At the same time, in case of need, France -- like other large and highly rated euro area member states -- may not benefit from these support mechanisms to the same extent, given that these resources might have already been exhausted by then."

0945 GMT: Still talking Grexit

Saxo Bank's chief economist, Steen Jakobsen, thinks Greece might still be looking at an exit from the single currency - possibly within the next six months.

"Although I want Greece to have all the best things in the world I think ultimately it will need to do something which is outside the box," he told TradingFloor.com in an interview. "The first quarter of next year will be the worst quarter of the debt crisis in terms of growth and the amount of headwind to austerity and the lack of ability to move to a mandate for change," says Steen. "We will see recovery inside the next four quarters in Europe but we need to go to a worse place first."

0920 GMT: Morgan Stanley warnings

The investment bank has slashed its GDP forecast for the Eurozone by a full one half of one precent for next year and predicts a contraction of -0.5 percent for the whole of 2013.

The bank also suggests Moody's may move on the UK's triple-A debt rating as early as next month:

"The UK's fiscal position and the risk of a ratings downgrade remain a concern that could come to a head with Chancellor Osborne's December 5 autumn budget statement. The budget continues to overshoot the government's fiscal consolidation targets, with the deficit and debt for 2012 likely to reach 7% and 97% of GDP, respectively, in the new OBR projections to be published alongside the autumn budget statement," wrote Gabriel de Kock, Morgan Stanely's head of US FX strategy. "However, he will most likely need to either make a mid-course correction - implementing more austerity to get the budget and debt back on track - or to accept an overshoot driven by weaker than expected global and UK economic activity..These outcomes could affect the GBP market value through one of three channels: Renewed austerity could drive real interest rates deeper into negative territory and compel the MPC to implement more aggressive unconventional policy easing. Second, accepting an overshoot could undermine confidence in the government. And, third, the likelihood of a sovereign downgrade would rise."

0905 GMT: Analyst reaction

Here's what Stephen Pope of Spotlight Ideas has to say about last night's downgrade of France by Moody's:

"The move is justified as since his election In May and then the return of a socialist majority in June, the President has attacked the wealth creators as in October his government unveiled EUR20Bn in new levies on the leading French companies as well as attacking high earners and the wealthy. Killing free enterprise may a socialist dream...but it will stifle growth and all efforts to recreate competitiveness. French yields have fallen heavily since Hollande assumed office...but we at Spotlight are convinced that with political certainly in France it simply suited the international market to have a large liquid bond alternative to the skinny yields that have prevailed on all German maturities."

0850 GMT: Greek Buyback?

Another report doing the rounds this morning, this time from Reuters, is eliciting some discussion in the market. Germany, the news agency reports, is floating the idea of allowing voluntary participation in a buyback of outstanding Greek debt at 25 percent of face value. The offer, however, would only be for private sector holders of Greek government bonds (GGBs) as the so-called "Official" or public sector has stated in every way possible that it will *not* write down, write off or assume a haircut on the GGBs it holds.

Why the private sector - which was already press-ganged into a €100bn haircut as part of the biggest bond restructuring in history, would agree to this is a mystery. Firstly, the action would slash their holdings to just pennies of face value. Secondly, it would fly in the face of repeated assurances that Greece "will not default". If those assurances are true, surely the cash flow from the coupon payments and the value of the bonds at maturity are far, far more valuable than the 25 percent face value trade that's reportedly being proposed? Yes, the buyback would free-up large portions of bank balance sheets and lope billions (up to 11 percentage points of GDP ) in debt from Greece's books, but the pain being demanded of the private sector - when the Official sector is prepared to take none - seems a bit too rich in this case.

0835 GMT: Rising Euro

The single currency appears to be getting some support this morning on the back of a article in the German daily "Bild" which suggests German lawmakers are prepared to concede an extra €14bn in funding for Greece to carry them through until 2014. The extra funding would need parliamentary approval after the nation's constitutional court, the Bundesverfassungsgericht, demanded this conditon after it approved Germany's participation in the region's permanent bailout fund.

The Euro is now trading back above 1.28 against the US dollar and was last quoted at $1.2803.

0825 GMT: Good Morning!

We're back with the live blog in anticipation of an interesting session today following last night's not-terribly-surprising one-notch downgrade for France (to Aa1) by Moody's Investors Service and ahead of a potential swing decision on Greece's financial rescue by the Eurozone's finance ministers. We're also looking at a Treasury bill auction from Spain and some testimony by two of the most senior members of the Bank of England - Mervyn King and Paul Tucker - to Britain's Parliamentary Commission on Banking Standards.

Equity markets have opened with a slightly bearish tone, particularly in France, with 0.5 percent dips across the board while the broadest measure of blue-chip stock performance, the FTSE Eurofirst 300, fell around 0.2 percent in early trading to 1,089.79. German December bund futures are up around 12 ticks at 143.13. Benchmark 10-year French government bond yields are trading 2 basis points higher at 2.098 percent.