Anglo-French relations hit a new low yesterday as the head of France's central bank made an extraordinary call for the UK to be stripped of its gold-plated sovereign credit rating.
Christian Noyer's attack follows President Nicolas Sarkozy's cold-shouldering of David Cameron at last week's Brussels summit, after the UK prime minister vetoed treaty changes to tackle the region's sovereign debt crisis.
Fears over the exposure of France's banks to Europe's strugglers has seen the nation's own triple-A rating come under threat from Standard & Poor's, but Mr Noyer said the UK should be first to suffer at the hands of the ratings agencies.
He told a French newspaper: "A downgrade doesn't strike me as justified based on economic fundamentals. Or if it is they should start by downgrading the UK, which has a bigger deficit, as much debt, weaker growth and where bank lending is collapsing."
Mr Noyer's cross-Channel swipe is the latest shot in a diplomatic row between the old enemies after George Osborne's recent claims that markets were ready to turn on France – triggering fury in Paris. But bond markets have given their own much different verdict in recent weeks with Britain's benchmark cost of borrowing at 2.1 per cent yesterday, well below France's 3.1 per cent.
A Government spokesman said: "We have put in place a credible plan for dealing with the deficit and the credibility of that plan can be seen in what's happened to bond yields in this country."
Mr Sarkozy, who faces elections next year, has sought to shore up France's public finances with tax hikes and spending cuts although he trails his Socialist rival heavily in the polls. But France's credit quality has come under scrutiny since mid-October when the ratings agency Moody's said its financial strength had been sapped by the eurozone crisis, prompting Sarkozy to unveil another €18.6bn (£15.6bn) in austerity measures to slash the country's deficit to 3 per cent of GDP by 2013.
Even this may not be enough to save France's AAA rating, with Mr Sarkozy appearing braced for the eventuality this week, telling Le Monde that the impact was "not insurmountable".
Major French banks such as BNP Paribas and Société Générale have written off billions on their exposure to Europe's bailout cripples and struggled to raise cash in money markets.
Jonathan Loynes, at Capital Economics, said: "The big difference between the two is that France is clearly much more exposed to the problems in the rest of Europe than the UK."
According to the Bank for International Settlements, France's banking system has more than twice the exposure of the UK to the eurozone strugglers at some 22 per cent of GDP, Mr Loynes added. He said: "France is tied to the European Central Bank but we have our own policy mechanism – we can print money but the French can't do that. That is why our bond yields are lower than France – France is seen by the markets as something between the core and the periphery in markets now."
* Last night, Fitch Ratings downgraded the viability ratings for eight of the world's biggest banks – Bank of America, Barclays, BNP Paribas, Credit Suisse, Deutsche Bank, Goldman Sachs Group, Morgan Stanley and Société Générale.
EU deal splits widen as two threaten to exit over tax
The pact to save the eurozone grew increasingly shaky yesterday after two more EU members – Hungary and the Czech Republic – threatened to pull out.
Although David Cameron was vilified by many in Europe for vetoing the Brussels proposals last week, the pact between the 26 EU nations that agreed is rapidly unravelling. Hungary and the Czech Republic, neither of which use the euro, said yesterday that the new fiscal rules were unacceptable if they were to take away their independent taxation rights.
Czech prime minister Petr Necas said: "We support the solutions which result in the stabilisation for the eurozone but we are convinced that tax harmonisation would not mean anything good for us."
Their concerns came just a day after Ireland suggested it may have a referendum on the reforms agreed at the summit. Across the EU, leaders are facing opposition calls to reject the pact.
Lloyds Bank Corporate Markets' Jeavon Lolay said: "It was always clear that the sort of integration being talked about last week would be extremely challenging. How much control are these countries really going to be happy to cede?"
Meanwhile, another raft of gloomy economic data highlighted the dangers eurozone members face. The Eurozone Composite Purchasing Managers Index continued to register contracting activity among companies.
Economists said the numbers still indicated recession looks inevitable.
Christine Lagarde, managing director of the International Monetary Fund, said the global outlook was "quite gloomy" and will require action by all countries to head off an escalating crisis that carries risks of a global depression. "The crisis is not only unfolding, but escalating," she said. "It is not a crisis that will be resolved by one group of countries taking action. It is going to be hopefully resolved by all countries, all regions, all categories of countries actually taking action."Reuse content