Zero growth, debt crisis pile pressure on France

AFP/Paris

France’s President Nicolas Sarkozy (centre) walks with French army officials and Defence Minister Gerard Longuet (third left) on the deck of the aircraft carrier Charles de Gaulle yesterday, as it returns to the port of Toulon after participating in the NATO-led mission against Libya. The gloomy figures complicate Sarkozy’s bid to slash France’s deficit from 7.1% of gross domestic product last year to 5.7% this year, 4.6% in 2012 and 3%, the EU ceiling, by 2013

France faced renewed pressure yesterday to convince rattled markets it can deliver on debt targets and keep its prized triple-A credit rating after data showed economic growth skidding to a halt. The bleak news came after a dramatic week that saw French banks pummelled on stock exchanges as President Nicolas Sarkozy cut short a holiday to order deeper cuts and call a eurozone crisis summit with his German counterpart. The government insisted that French economic fundamentals remained “solid” and that the country was still on course to reach its official target of 2% growth for the year. Sarkozy’s promises to prune France’s public deficit—the shortfall between government spending and revenue—are based on the 2% forecast but the latest data support analysts’ forecasts that the goal is too optimistic. The zero growth in the second quarter of 2011 came after a robust 0.9% in the first, the statistics agency INSEE said, noting that the main cause was a drop in household consumption. The gloomy figures complicate Sarkozy’s bid to slash France’s deficit from 7.1% of gross domestic product last year to 5.7% this year, 4.6% in 2012 and 3%, the EU ceiling, by 2013. “With the economy stagnating and (presidential) elections coming up next spring, it will be extremely difficult to implement the aggressive austerity measures that are needed to convince markets that the government finances are on a stable footing,” said Jennifer McKeown at Capital Economics The zero growth data “may add to investors’ fears of a possible downgrade of French sovereign debt,” she said. After the European Central Bank stepped in this week to buy government bonds of Italy and Spain, lowering their borrowing costs, the market turned its fire on France as rumours swirled about the solidity of its triple-A credit rating. “The euro’s new lines of defence run not through Italy and Spain, but France,” The Economist magazine declared in its latest edition yesterday. However, the yield on benchmark French 10-year bonds fell yesterday below the three% level for the first time since November 2010, dropping to 2.979%. French ministers have battled all week to head off speculation that France will be the next country to lose its top credit status after Standard & Poor’s stripped the US of the prized rating a week ago. The three leading rating agencies all said they had no plans to downgrade France but speculation intensified as the week progressed. If France, the eurozone’s second-largest economy, lost its AAA rating the effect would stretch far beyond its borders. France provides the second-largest contribution, after Germany, to the eurozone’s temporary rescue fund, the European Financial Stability Facility, which enjoys an AAA rating to borrow at low rates and lend to states under bailout programmes. Markets are wondering whether France and Germany can continue to underwrite the debts of troubled eurozone countries without losing their own top credit ratings and thus falling victim to the crisis themselves.The crisis started in Greece, which had to be bailed out along with Ireland and Portugal, and is now fuelled by fears that Spain or Italy might default on their debt and possibly spark a break-up of the 17-nation currency zone. France, Belgium, Spain and Italy, all under intense pressure from the financial markets, yesterday slapped a ban on the speculative practice of short-selling bank stocks to combat “false rumours” that destabilised them. The move echoes steps taken at the height of the global financial crisis sparked by the collapse of US investment bank Lehman Brothers in 2008.