French banker hints at UK downgrade

Tensions between London and Paris were heightened further today after the head of France's central bank suggested that the UK was a candidate for a credit rating downgrade.

France is bracing itself for the potential loss of its coveted AAA rating after two credit agencies last week indicated they were considering marking down countries across the eurozone.

But Banque de France governor Christian Noyer said they should instead be looking at the UK because of the scale of debt and inflation and the poor levels of growth and bank lending on this side of the Channel.

His comments came a day after President Nicolas Sarkozy was quoted as branding David Cameron an "obstinate kid" for refusing to sign up to a treaty to rescue the euro last week.

Mr Noyer told Le Telegramme newspaper that a downgrade for France - which would drive up the interest Paris pays to borrow and make loans in the wider economy more expensive - "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, more inflation, weaker growth and where bank lending is collapsing," he added.

Downing Street responded with restraint. Mr Cameron's official spokesman said: "We have put in place a credible plan for dealing with our deficit and the credibility of that plan can be seen in what has happened to bond yields in this country."

The spokesman also played down suggestions that the Prime Minister was seeking to undermine the agreement secured between 26 EU states at last week's summit in Brussels after he used his veto to block a treaty involving all 27.

Mr Cameron has promised the UK will "engage constructively" in talks which are getting under way in Brussels on the implementation of the "fiscal compact" devised by France and Germany, which was agreed in principle by the 26 last Friday.

Over the past few days, Mr Cameron has spoken to his counterparts in non-euro states Denmark, Sweden and the Czech Republic, all of whom are said to have concerns about the compact, as well as with Enda Kenny of eurozone member Ireland, who has warned he may have to put it to a referendum.

The Prime Minister assured Tory MPs at a meeting of backbenchers last night that the eurozone row was not a matter of "26 to one", sparking speculation that he might be seeking allies in a bid to exert UK influence over the ongoing talks.

Mr Cameron's spokesman rejected reports that the PM was agitating against the agreement.

"He has been speaking to a number of different European leaders in recent days and will continue to do so in the coming days, with the objective in mind of making clear that we want to engage constructively," said the spokesman.

"There is an inter-governmental agreement and a discussion about how to implement that inter-governmental agreement and we are seeking to engage constructively in that discussion.

"You would expect him to speak to a number of different European leaders in the coming days."

The spokesman said that Deputy Prime Minister Nick Clegg - who yesterday said the whole coalition Government was "absolutely determined to re-engage with our European partners" - was also expected to talk to EU politicians about the way forward, as were Chancellor George Osborne and Foreign Secretary William Hague.

German Chancellor Angela Merkel yesterday held out an olive branch to London, saying the UK would remain "an important partner in the European Union" and holding the door open for its eventual involvement in the new compact.

But Downing Street said its position had not changed and Britain would only sign up if it obtained safeguards for the City of London which were roundly rejected last week.

PA