STOCK MARKETS slumped again yesterday, resuming their downward trend amid fears that France could become the next major economy to be stripped of its coveted triple-A credit rating.
Tuesday’s relief rally, sparked by the US Federal Reserve’s promise to freeze interest rates until 2013, proved short-lived as investor confidence was knocked by the possibility of French downgrade. The US lost its top credit rating last weekend.
French president Nicolas Sarkozy yesterday cut short a holiday to chair an emergency meeting of senior ministers and the French central bank governor in Paris. He said his government would explore new measures to reduce the size of France’s borrowing.
At the meeting, he gave his finance minister François Baroin and budget minister Valerie Pecresse one week to come up with proposals to reduce the country’s deficit to 4.6 per cent of gross domestic product next year and 3 per cent by 2013.
France’s budget deficit stood at 7.1 per cent in 2010 and is on track to come in at 5.7 per cent this year. Levels of public debt, at 85 per cent, stand well above the euro zone’s recommended level of 60 per cent.
Despite fears over France’s credit rating, all three of the main ratings agencies have stated that the country’s credit rating is stable.
Worries over the French economy nonetheless punished its banks in particular, but also halted stock-market rallies around the world.
France’s second-largest lender, Société Générale, plunged more than 22 per cent at one point during the trading, while the country’s CAC 40 index closed 5.5 per cent lower.
European shares in general fell to two-year lows, while Dublin’s Iseq gave up 2.2 per cent.
The rout extended across the Atlantic, although reassuring comments from Bank of America’s chief executive helped to calm US stocks as they headed towards the close.
In France, Mr Sarkozy said it was “imperative” that the country met its debt reduction targets.
French officials have signalled that its citizens can look forward to a range of deficit-battling measures in the 2012 budget.
The likely closure of tax loopholes and imposition of new taxes on high earners are unlikely to come close to austerity measures already levied in countries such as Greece and Ireland, however.
Irish borrowers meanwhile learned yesterday that pressure on them is likely to grow after Bank of Ireland flagged plans to raise variable rates on its loans.
Posting a loss of €723 million for the first half of the year, the bank blamed the likely rises on the higher costs it faces to access funding.
“Deposit costs have remained very, very elevated,” said chief executive Richie Boucher. “I don’t think that we continue to bear that.”