Belfast Telegraph

Thursday 18 December 2014

Domino effect feared for Europe after France loses AAA rating

France's loss of its AAA rating could have serious consequences for the whole of the European Union.

It could be calamitous for President Nicolas Sarkozy's chances of re-election in May.



It could produce a domino effect on the debt ratings of French and European financial institutions. And as France, the second-largest economy in the EU, is one of the main guarantors of the eurozone bailout fund, that fund could now also lose its AAA status.



French officials and financial commentators insisted last night that there was no cause for alarm. They took comfort from the fact that the Standard & Poor's ratings agency had reportedly decided to reduce French sovereign debt by only one notch, to AA+. They pointed out that sentiment on international markets had, in practical terms, already downgraded French debt weeks ago by at least this amount.



All now depends on whether the markets take the downgrade as "old hat" or the starting gun for a new assault on the euro.



One French official said last night that the downgrade was "like a slow-motion train crash. Everyone knew it was coming. We could do nothing to stop it. We just have to watch and hope that the death toll will be limited."



Sources in the Élysée Palace said the President was "exasperated" by a "wilful" decision which flew in the face of the recent easing of tensions on European debt markets.



In recent months, Mr Sarkozy has placed fiscal rectitude and his euro-rescuing high-wire act with the German Chancellor, Angela Merkel, at the centre of his undeclared re-election campaign. Last summer he told supporters privately: "If we lose our AAA, I'm dead."



The Prime Minister, François Fillon, said before Christmas that a ratings downgrade would be "one more problem... but not insurmountable".



All depends on how you stack up the figures. The British annual deficit is higher, but accumulated French debt is a higher proportion of GDP. S&P also pointed out in December that France was the only AAA country in Europe with a "primary deficit": in other words, even when debt re-payments are excluded, the French government is spending more money each year than it is gathering in taxes.



In November, in an attempt to save its rating, Mr Sarkozy's government imposed €18.6bn in extra tax increases and spending cuts. It has pledged to reduce its deficit from 5.7 per cent of GDP to 4.5 per cent this year and to 3 per cent in 2013.

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