France says rating safe despite Moody's warning, weak

Reuters News
Posted: Oct 18, 2011 5:43 AM
France says rating safe despite Moody's warning, weak

By Daniel Flynn and Nicholas Vinocur

PARIS (Reuters) - France insisted on Tuesday its triple-A credit rating was safe despite a warning shot from ratings agency Moody's but it acknowledged growth would probably miss its target and more belt tightening may be needed ahead of elections next year.

Moody's raised the prospect of one of the pillars of the euro zone losing its coveted triple-A status, saying on Monday it could place France on negative outlook in the next three months if the costs for helping to bail out banks and other euro zone members overstretched its budget.

Moody's also cited a downside risk to France's economic growth outlook, which could complicate efforts to cut a budget deficit forecast for 5.7 percent of gross domestic product (GDP) this year -- roughly the same level as bailed out Portugal.

Economic growth in France, the euro zone's second-largest economy, ground to a halt in the second quarter. While most economists expect a pick-up later this year, they see weak growth continuing in the medium-term as unemployment remains mired at around 9 percent, undermining domestic consumption.

Finance Minister Francois Baroin acknowledged the government's 2012 growth target of 1.75 percent was probably too high and would have to be adjusted, without saying by how much or when.

"It is probably too high compared to the development of the economic situation ... We will adapt it, that much is clear," he told France 2 television.

He said, however, that France's triple-A -- which is essential to the viability of the euro zone's 440 billion EFSF rescue fund which is largely underwritten by Germany and France -- was safe because the government stood ready to take additional budgetary steps to safeguard it.

"It is not in danger because ... we will even be ahead of schedule in passing deficit reduction measures," he said.

With a tough re-election battle looming in April, President Nicolas Sarkozy has been wary of politically unpopular cuts to public spending, but announced a 12 billion euro package of deficit reduction measures just two months ago, mostly consisting of eliminating tax breaks.

Prime Minister Francois Fillon said late on Monday that next year's budget would work even if growth fell to 1.5 percent. He said a European leaders' summit this weekend would be decisive in re-establishing confidence in the euro zone.

"If we are capable in the next two weeks to put together measures strong enough to stop the speculation ... then there will be growth in 2012 and we will reach the 1.5 percent," he told France 2. "If we fail, then it is serious because the whole world will be at risk of a recession and we will have to take new measures."


Michel Martinez, an economist at Societe Generale in Paris, said that France still has the ability to correct any growth shortfall with deficit-cutting steps, but said the government needed to take action before year-end.

"The adjustment needs to be made in the next three months or so, before the presidential election campaign gets into full swing," he said. "If that does not happen, it will be too late and the 2012 deficit targets will not be respected."

A Reuters poll last week predicted that French growth would slow to 1.0 percent next year -- a scenario that would force the government to find billions of euros.

With Sarkozy's main opponent for next year's election, Socialist candidate Francois Hollande, also pledging to meet France's EU commitment to reduce its deficit to 3 percent of GDP by 2013, Moody's noted that political risk was not a major factor for France.

The government, however, faces the prospect of guaranteeing up to 33 billion euros of Franco-Belgian lender Dexia SA's toxic debt. French government officials say there will be no major impact on the public deficit.

With European Union leaders considering steps to recapitalise the region's banks to insulate them from the risk posed by the debt crisis, France has insisted that other French banks like BNP Paribas and SocGen would be expected to find their own capital via retained earnings and dividend cuts.

But analysts noted it was weak growth, not the banking sector, which posed the main threat to France's ratings.

"The banks' recapitalisation is just a one-shot operation. This would impact the debt, but the real problem is the trajectory of public finances and therefore growth," said Jean-Louis Mourier of brokerage Aurel Leven BCG.

"The problem with French public finances is not so much the level of the debt, which is comparable to Germany's: the problem is that economic growth is the road toward restoring public finances, and the growth outlook for France is weak for the coming years," he said.

(Reporting by Nicholas Vinocur, Geert De Clercq and Marc Joanny; writing by Daniel Flynn; editing by Anna Willard/Mike Peacock)