French President Nicolas Sarkozy is not ready to admit it, but France has begun to fear that it will be next in the markets’ firing line as the debt crisis spreads from Greece and Italy.
The ratings agency Standard & Poor’s gave Paris a jolt on Thursday, announcing “in error” it had downgraded France’s credit worthiness. It withdrew the statement, but other signs of trouble are mounting.
The “spread” or gap between French and German 10-year bond yields has never been higher, as investors skip over France and invest in its safer neighbor, and the government’s borrowing costs are rising.
France now pays 3.46 percent interest on its bonds, more than twice as much as Germany, although still around half as much as Italy does — for now.
At stake is France’s coveted “AAA” credit rating. Any downgrade would be a humiliation for Sarkozy six months before he is due to seek re-election and a blow for European leaders in their battle to save the euro.
NEXT IN LINE
“After Greece and Italy, France?” Le Monde’s Friday headline said, over a stark graphic showing France’s 1.7 trillion euro (US$2.3 trillion) debt just short of Italy’s 1.9 trillion and dwarfing Europe’s trillion euro bailout fund.
This week Sarkozy scrambled to promise a second round of austerity measures, but Brussels was quick to call them insufficient, markets were unimpressed and some believe the crisis is already here.
“Let’s not have any illusions. On the markets, French debt has already lost its ‘AAA,’” said Jacques Attali, advisor to former French president Francois Mitterrand and former head of the European Bank for Reconstruction and Development.
‘INSUFFICENT’
“When we see the state’s borrowing costs over 10 years and the direction of the Franco-German spread, French debt is treated as ‘AA,’” he said, judging the government’s latest austerity program as “obviously insufficient.”
The French government is still officially hoping for 1 percent GDP growth next year, but the European Commission is more pessimistic, predicting only 0.6 percent, which would make it tough to meet debt-reduction targets.
“Concerning 2013, further measures will be needed in order that excessive deficit is corrected,” EU Commissioner for Economic and Monetary Affairs Olli Rehn said on Thursday, after studying the French austerity plan.
In the run-up to what promises to be a difficult re-election battle, it is hard to see what Sarkozy might be able to cut, while French Budget Minister Valerie Pecresse says there will be no new austerity package.
SLASH AND TAX
The latest one, announced last Monday, added 7 billion euros in cuts or new revenues to the budget, following a 12 billion euro plan announced in August.
Sarkozy’s most dangerous opponent, Socialist candidate Francois Hollande, has accused Sarkozy of adding 500 billion to France’s debts during his five-year term with tax giveaways to big business and the rich.
On Friday, Hollande denounced Sarkozy’s economic record and warned that “the markets have already anticipated” a French downgrade.
‘RUINOUS’
The right, in turn, has denounced Hollande’s spending plans — which are limited by the situation, but include hiring 60,000 teachers — as “ruinous.”
Polls show the debt and the economy top voters’ concerns and, despite a recent small surge in support for Sarkozy, predict a clear Hollande win.
Meanwhile, France’s position cannot be divorced from that of the wider eurozone, where political and economic crises in Greece and Italy and stalling growth everywhere, calling into question the single currency itself.
Unlike Italy, where much of the government’s debt is held by domestic investors, France borrows much of its government money from abroad, making it more vulnerable to international market sentiment.
In addition, French banks are holding tens of billions of euros in Italian debt — any repeat in Rome of a Greek-style partial default would hit the sector hard and strain the ability of Europe’s bailout fund to keep it afloat.
Sarkozy and German Chancellor Angela Merkel were forced to defend the project once again last week after reports that officials were quietly drawing up contingency plans for the break-up of the zone.
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