Feisty Sarkozy shrugs off French credit downgrade

AP News

1/16/2012 3:42:43 PM - AP News

French President Nicolas Sarkozy bluntly declared Monday that a harsh downgrade by Standard & Poor's of France's formerly top-rung debt rating "changes nothing" for the eurozone's No. 2 economy.

Sarkozy, in a testy exchange with a journalist at a Madrid news conference, suggested that a solid investor demand for a French debt auction Monday and a reaffirmation from rival ratings agency Moody's of France's triple-A sovereign debt had offset S&P's much-publicized downgrade.

"We have to react to this with calm, by taking a step back," he told reporters during a visit with Spain's new prime minister, Mariano Rajoy. "At the core, my conviction is that it changes nothing."

The S&P downgrade Friday _ which Sarkozy's own finance minister called "bad news" _ came just 100 days before the president faces what is expected to be a tough re-election campaign.

The news conference began combatively when Sarkozy refused to answer a question about whether France's downgrade would affect its ability to lead Europe out of the crisis _ and if the move prompted the postponement of a crisis summit for him and the leaders of Germany and Italy next week.

Sarkozy and German Chancellor Angela Merkel have taken the lead in proposing solutions to the crisis and major decisions are often hashed out at their meetings ahead of European summits.

"You don't have the latest information," Sarkozy retorted to a reporter who asked about the downgrade and the summit. Sarkozy refused to answer even after the reporter rephrased his question twice.

The French leader later confirmed that the three-way summit would take place in February and downplayed the S&P downgrade, but never gave a clear answer as to why the summit was rescheduled.

Sarkozy did manage to win much-needed political support from Rajoy _ notably for his pet project for a financial transaction tax that could help ailing European state coffers get out of the red.

France, which has long enjoyed relatively low borrowing costs and had S&P's top-tier AAA rating uninterrupted since the mid-1970s, on Friday was the largest of nine eurozone members hit by S&P downgrades _ dropping one notch to AA+. The agency also kept a negative outlook on French state debt.

Analysts said Sarkozy's denial that the downgrade meant much was wishful thinking.

"The fact that there is a negative outlook, it means that there is a probability _ a quite high probability _ of further downgrade in 2012, 2013," said French economist Norbert Gaillard. "So it's bad news for France."

But in a vindication of sorts for Sarkozy, France sold euro8.6 billion ($10.9 billion) in short-term debt on Monday. The yields _ or the interest rates charged by investors on the debt _ fell, a sign investors still see the country as a good bet.

Spain was also hit by an S&P downgrade, from AA- to A+, but Rajoy said that blow and downgrades for other European nations shouldn't be seen as a sign they will have trouble emerging from the financial crisis.

Rajoy's Socialist predecessor also supported the financial transaction tax, but Jose Luis Rodriguez Zapatero was ousted from office by Spaniards angry about the country's hurting economy and high unemployment.

The European Commission has estimated that the tax could raise as much as euro57 billion ($72.2 billion) a year, funds that could be used to help reduce the substantial budget deficits crippling European economies.

Moody's cited France's economic strength as a reason for affirming its top rating, but said bleak growth prospects in France and the region present "risks to the French government's fiscal consolidation plans."

Moody's said it would again review French debt later in the first quarter as part of a broader look at sovereign debt within the EU _ meaning a decision is likely close to France's two-round presidential vote in April and May.

Sarkozy's challengers for the presidency _ including Socialist nominee Francois Hollande _ have seized on the S&P downgrade as evidence that his policies are wrong-headed and ineffective.

It will be a bruising election battle for Sarkozy, a dynamic leader who has a strong international profile but is widely disliked at home. Leftists say he has coddled the rich, while many of those who supported him in his 2007 campaign say he hasn't fulfilled his promises.

And Hollande is currently leading in the polls.

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Angela Charlton and Sarah DiLorenzo in Paris, and Alan Clendenning in Madrid contributed to this report.