BORROWING COSTS:FRANCE FOUND itself on the defensive yesterday after the European Commission said its economic growth targets were too optimistic and its cost of borrowing surged.
Just days after Paris unveiled its second austerity package since August in the hope of protecting its precious triple-A credit rating, the commission urged it to take further steps to ensure it can cut its deficit to the EU limit of 3 per cent by 2013.
Nicolas Sarkozy’s government recently cut its growth forecast for 2012 to 1 per cent from 1.75 per cent. The commission said it will be weaker than that and that further cutbacks would be inevitable.
Investors’ dwindling confidence in Italy has intensified pressure on France, which saw the interest rate on its 10-year bonds rise 19 basis points to 3.41 per cent – the highest level since July.
The spread, or difference, between French bonds and those of Germany hit a new record of 1.66 per cent yesterday afternoon – a jump of 36 basis points in just a week.
While the widening gap is partly due to a decline in Germany’s own cost of borrowing as investors flock to a safe haven, the prominent French economist Jacques Attali – an advisor to former president François Mitterrand – said it meant France had already “de facto lost its triple-A”.
French nerves were not helped when the credit ratings agency Standard Poor’s put out a message saying France had been downgraded before quickly retracting it and blaming a “technical error”.
Mr Sarkozy has made keeping the top-notch rating one of his priorities, and its loss would be a huge symbolic reversal six months before an election.
In response to the commission’s call for more austerity, finance minister François Baroin and budget minister Valérie Pécresse insisted the latest savings would be big enough to bring France’s deficit into line with EU limits.
They said they had built in enough leeway to offset the impact of lower-than-expected growth in 2012 and 2013.
France is trying to reduce its budget gap from 5.7 per cent of GDP this year to the EU limit of 3 percent of GDP by 2013. Prime minister François Fillon has said next year’s budget will be the toughest since 1945.