France battles rumours of credit-rating downgrade

The Standard & Poor's credit rating agency said it saw no reason to downgrade sovereign debt as France had a clear policy to reduce its budget deficit

John Lichfield
Wednesday 10 August 2011 00:00

French ministers attempted yesterday to head off speculation that Paris might be the next big country to lose its AAA credit rating.

Both the finance and budget ministers gave lengthy radio interviews which seemed to be aimed more at the "bond vigilantes" on international markets than their domestic audience. Valérie Pécresse, the budget minister, said France would "not deviate one iota" from its promise to reduce its budget deficit from 7.1 per cent last year to 4.6 per cent of gross domestic product next year and 3 per cent by 2013.

If "more efforts" – ie spending cuts or tax rises – were needed, Ms Pécresse said, "then we will make more efforts". Her boss, the finance minister François Baroin, gave a similar pledge and spelled out the reasons why international investors should have no fear for France's economic stability.

"France has a diversified economy, a skilled workforce, a strong banking system and one of the highest savings rates in the world," he added.

Earlier this week, the Berlin-based economics institute, the DIW, warned that France could be the next target, after the US, for a downgrading by one of the international rating agencies of its AAA rating for sovereign, or government, debt. The DIW said such a move could be the straw that broke the back of the euro.

The Standard & Poor's rating agency, which was widely vilified for downgrading US sovereign debt last week, said this week that it saw no reason to take similar action against France. It said the French, unlike the Americans, had a clear policy to reduce the budget deficit.

Nonetheless, there has been pressure on French debt on the financial markets. The cost of credit default swaps – insurance policies against a default – on French debt have reached record levels in recent days.

Paris has, so far, done less than Britain or even relatively prosperous Germany to cut back government spending.

France is one of the few large countries to still have a "primary" budget deficit, in other words a deficit even after repayments on old debt have been excluded.

Painful decisions face the French government when it puts forward next year's budget this autumn, just before next spring's presidential election. France pays €50bn a year interest on its old debts.

Its remaining "deficit" is €60bn a year, all of which has to be dissolved by spending cuts or tax rises if Paris is to meet its target of a deficit of 3 per cent of GDP by 2013.

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