ISSN 2330-717X

France’s Sarkozy Fails To Reassure Markets

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President Nicolas Sarkozy interrupted his Côte d’Azur holiday for crisis meetings yesterday (10 August), as the Paris stock exchange lost 5% of value amid rumours that France may lose its triple ‘A’ rating.

With an election just eight months away, Sarkozy summoned senior ministers and the central bank chief to emergency talks in Paris, interrupting the August holidays, usually considered sacrosanct for the French political class.

France
France

France – the most indebted of the euro zone’s six AAA-rated states – has vowed to cut its deficit to 4.6% of GDP next year and 3% in 2013, down from 7.1% in 2010 and an expected 5.7% this year.

The three major rating agencies reaffirmed France’s AAA rating on Wednesday, and said its outlook was stable, but markets remain concerned that French banks are among the most exposed to a worsening of Europe’s government debt crisis.

Sarkozy urged French political parties to support his proposal for a constitutional rule to limit future deficits which is set to be defeated if put to a vote in both chambers of the French parliament.

The French President was central to the 21 July eurozone summit agreement to give the European Financial Stability Facility (EFSF) the power to buy sovereign bonds on the secondary market and provide Greece with a new multibillion-euro bailout.

With the opposition Socialist Party on board, parliament should pass the required amendments to the 2011 budget at special sessions on 6-7 September – tacking an extra 15 billion euros onto France’s public debt by 2014, equivalent to adding 0.75% to the debt-to-GDP ratio, Reuters reported.

Lawmakers on the left have vowed to block Sarkozy’s proposal for a constitutional “debt brake” if it goes to a two-chamber vote in coming weeks, however, as part of the jockeying for political position ahead of next year’s presidential election.

The Socialists oppose tampering with the Constitution, and claim that the reform would have only a limited impact since individual governments retain the right to set deficit ceilings under French law.

Markets, however, see the constitutional amendment as indicative of France’s commitment to fiscal prudence and some analysts fear that rating agencies could react to failure of the initiative by putting France on negative outlook, or on review for a possible downgrade.

Following the Elysée meeting, Sarkozy returned to his wife Carla Bruni’s family villa at Cap Nègre. In the meantime the country’s CAC 40 index closed 5.5% lower. Shares in Société Générale, the country’s second-largest bank, fell 21% before rallying slightly to a final loss of 14%. Shares in BNP Paribas, the country’s largest bank, fell 9.5%.

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