Bloomberg News

France Ratings Pressure Handicaps Sarkozy in EU Crisis Talks

October 19, 2011

(Adds today’s decline in French bonds. See EXT4 for more on the European debt crisis.)

Oct. 19 (Bloomberg) -- French President Nicolas Sarkozy heads into decisive talks on Europe’s debt crisis handicapped by concern that France’s top credit rating is at risk.

While Sarkozy’s banks have the most to lose if a potential Greek default triggers contagion, moves to expand rescue efforts or recapitalize banks at government expense add to pressure on French finances. A rating cut may also hinder Sarkozy’s re- election bid in 2012.

“It’s a classic trap of contagion that is now closing in on France,” Philippe Martin, an economics professor at the Institute of Political Studies in Paris, said in an e-mail yesterday. “This is very dangerous. Everyone in the government has insisted that everything they do is with the objective of keeping the triple-A. If they lose it, it’s a disaster.”

The stakes for Sarkozy show how the crisis that began in Greece in 2009 has evolved into what world leaders say is the the main threat to the global economy. Group of 20 finance ministers set a deadline of an Oct. 23 European summit as the deadline for fleshing out a strategy to lay concerns to rest.

France, Europe’s second-biggest economy, is under pressure, Moody’s Investors Service said Oct. 17, because the global financial and economic crisis has made its debt measures the weakest among its Aaa rated peers, including Germany and the U.K. The company said its statement was a market update and not a rating action.

French Spreads

The yield on France’s 10-year bonds climbed 9 basis points today to 3.23 percent. That put the difference with German equivalents at 115 basis points, the widest since 1992 based on Bloomberg generic prices.

Shares of French banks rose, snapping a four-day losing streak. BNP Paribas SA, the biggest lender, has lost 35 percent so far this year; Societe Generale SA, the second largest, has shed 51 percent.

French banks have the most at stake in Italy, the third- largest euro economy, which needed the European Central Bank to start buying its debt in August amid a market rout. They’re also the most exposed to other debt strapped countries.

At the end of 2010, French banks carried $392.6 billion in Italian government and private debt, according to data from Basel-based Bank for International Settlements. Their combined exposure to Spain, Portugal, Ireland and Greece stood at $253.8 billion at the end of 2010, according to BIS.

Brussels Summit

The Brussels summit will address measures to recapitalize banks, decide the scale of Greek debt writedowns, increase the effectiveness of the euro region’s bailout fund and seek ways to better coordinate economic and financial policy.

While German officials have sought to temper expectations that a comprehensive strategy would be developed, French Finance Minister Francois Baroin was forced to defend his government’s finances. France will do “everything” to maintain its top debt ratings, Baroin said yesterday.

While debt is about 80 percent of gross domestic product in both France and Germany, the French budget deficit will be more than three times Germany’s this year.

The changing dynamic between Sarkozy and his German counterpart, Angela Merkel, was illustrated at their most recent meeting, on Oct. 9 in Berlin, when the French leader didn’t repeat his determination to prevent a Greek default, signaling his willingness to accept an outcome that Merkel has discussed.


Still, Sarkozy’s bind also implicates Merkel, the biggest contributor to bailout efforts and Europe’s dominant politician, said Nicolas Jabko, an associate professor of political economy at Johns Hopkins University in Baltimore.

“Merkel needs Sarkozy as a partner to legitimize everything she does in Europe,” said Jabko. “She needs to make sure that nothing appears as an exercise in German hegemony.”

It may also force Germany to accept spending more to arrest the crisis, Martin said.

“It will help focus Germany’s attention on the fact there is a liquidity and confidence problem on the markets and convince them that they absolutely have to take decisions,” he said. “Sarkozy can say ‘look at me. We’re next. You have to do something.’”

Domestically, the threat of a downgrade hurts Sarkozy, who faces Socialist Francois Hollande in presidential elections next April, with polls showing Sarkozy as the likely loser.

“One of Sarkozy’s few claims to a successful presidency is being the savoir of France’s image on the global and European stage,” said Jabko. “A downgrade would put that at risk, especially if it involves France having to slash spending in an election year.”

--Editors: James Hertling, Andrew Atkinson

To contact the reporter on this story: Gregory Viscusi in Paris at

To contact the editor responsible for this story: James Hertling at

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