France to reassess debt targets over downgrade fears

 

FRENCH PRESIDENT Nicolas Sarkozy has said his government will explore new measures to reduce the size of France’s public deficit amid concerns it could face a debt downgrade.

The move came as shares in France’s banks tumbled amid concerns over stability in the continuing market turmoil.

Mr Sarkozy urged all political parties to support new constitutional rules that would limit future deficits, a variation on Germany’s so-called “debt brake” rule.

The president, who cut short his summer holiday yesterday to chair an emergency meeting of senior ministers and the French central bank governor in Paris, said it was “imperative” France met its debt reduction targets.

At the meeting he asked finance minister François Baroin and budget minister Valerie Pecresse to explore new proposals designed to reduce the country’s deficit to 4.6 per cent of gross domestic product next year and 3 per cent by 2013.

They were asked to outline their suggestions at a follow-up meeting on August 17th, with Mr Sarkozy and French prime minister François Fillon. A further meeting is scheduled to formally agree the steps on August 24th.

“The deficit-reduction targets are imperative and will be met regardless of the evolution of the economic outlook,” said Mr Sarkozy in a statement after the meeting. The meeting was held amid swirling rumours about French banks, with Société Générale under particular pressure. The bank finished 15 per cent weaker after denying it was in difficulty. Other banks also slumped.

France is the most indebted of the euro zone’s six remaining AAA-rated states and some analysts question whether it could face a debt downgrade following Standard Poor’s decision to downgrade US debt. On Monday the cost of insuring French government debt reached record levels.

All three of the main ratings agencies have stated, however, that France’s rating is stable.

France ran a budget deficit of 7.1 per cent of GDP in 2010 and is forecasting a deficit of 5.7 per cent this year. Levels of public debt stand at 85 per cent of GDP, which is significantly above the euro zone’s recommended 60 per cent.

French economist Jacques Attali noted Standard Poor picked out France as the only AAA country that will face a similar debt ratio in 2015. “We are being explicitly picked out. We must therefore do everything to reduce our debt,” he told Le Monde.

Credit ratings agencies have not given any indication that a downgrade or review of France’s rating is imminent. But the turmoil in global markets, renewed fears over global economic growth and the ongoing euro zone debt crisis spilling over into Italy and France prompted Mr Sarkozy to come back from his summer break early.

Shares in Italian and Spanish banks also fell sharply in afternoon trading, again over fears about levels of sovereign debt.

Mr Sarkozy called the meeting ahead of important second-quarter economic growth forecasts, which are due to be published tomorrow. Many economists believe the French government’s forecasts of 2 per cent growth this year are optimistic. If it does not meet this target, additional measures will be needed to meet the deficit reduction targets.

“Whatever the impact of global uncertainty, of the announcement of the US downgrade by SP, the nervousness of markets, regardless of any of these external parameters we will take the necessary measures to reach our [deficit] targets,” said Mr Baroin.

French officials signalled earlier this week they would seek to cut an extra several billion euro from the 2012 budget, which will be debated by parliament from September 6th. It is anticipated that new deficit measures will include closing fiscal loopholes or levying new taxes on high earners.

The government is expected to carry the new measures, but the Socialist Party is threatening to block Mr Sarkozy’s proposal for a constitutional “debt brake”.