FRENCH REACTION:FRANCE'S MOST senior central banker has accused rating agencies of acting politically and potentially making the euro zone crisis worse after Standard & Poor's threatened a mass downgrade of governments in the single-currency area.
Given its heavy debts, sluggish growth and chronic budget deficit, France’s triple-A credit rating is considered the most vulnerable among the six top-rated euro zone states. A downgrade would raise its cost of borrowing and could force the government to impose new austerity measures before a presidential election next spring.
Ministers and officials moved to play down the Standard Poor’s decision yesterday, saying the agency was behind events and insisting France was in a strong position to withstand turmoil.
Bank of France governor Christian Noyer said the agency’s methods for assessing governments’ credit-worthiness had grown increasingly political.
“The agencies were one of the motors of the crisis in 2008. Are they becoming a motor in the current crisis? That’s a real question we all need to think about,” Mr Noyer told a conference in Paris.
“When you look at the way S&P formulated its argument, you can see that they have changed their methods. The methodology has become much more political and less linked to economic fundamentals,” Mr Noyer added.
Standard & Poor’s singled out France, saying the euro crisis had weakened its public finances and suggesting it would at best achieve growth of 0.5 per cent – half the government’s forecast – in 2012. The agency warned that it could cut France’s rating by two notches, rather than one for its triple-A peers.
The warning came just hours after France and Germany announced they had struck a deal on joint proposals to enforce budget discipline in the euro zone through treaty change. The plan, to be discussed by European leaders in Brussels tomorrow and Friday, includes more automatic sanctions for states that fail to keep deficits under control and an early launch of the permanent bailout fund.
S&P’s statement made no mention of that initiative, and the Élysée Palace suggested it had been drafted before the latest Italian austerity package or the deal between President Nicolas Sarkozy and Chancellor Angela Merkel had been announced.
A downgrade could automatically require some investment funds to sell bonds of affected states, making those countries’ borrowing costs rise further still. In France’s case, every additional 100 basis points in the interest rate it pays to borrow roughly equates to an extra €3 billion in yearly funding costs. That means a downgrade could knock its budget plans off-course. To show it is taking action to calm markets, France has unveiled two austerity packages in the past three months and says it is on track to balance the budget by 2016.
Its critics believe France’s growth forecasts are too optimistic, however, and accuse Mr Sarkozy of holding back the most painful cuts because he faces a presidential election in the spring. Commenting on the S&P statement, foreign minister Alain Juppé conceded that France had “more effort to make than others”.
The scale of the task facing Mr Sarkozy’s government was underlined yesterday when a new opinion poll by Ipsos showed the socialist François Hollande would beat him by winning 60 per cent of the vote in a two-way run-off.
Mr Hollande has accused Mr Sarkozy of caving in to Dr Merkel’s demands for budgetary discipline and ceding too much sovereignty. One of his senior party colleagues, Arnaud Montebourg, likened Dr Merkel to former German chancellor Otto von Bismarck, whose forces defeated France in the Franco-Prussian war in 1870.