Bloomberg News

Sarkozy Sees More Budget Cuts to Save AAA Rating as Growth Slows

October 27, 2011

Oct. 28 (Bloomberg) -- President Nicolas Sarkozy plans up to 8 billion euros ($11 billion) in additional budget cuts to protect France’s AAA credit rating, after he said growth next year will slow to about 1 percent.

Speaking for more than an hour on national television late yesterday, Sarkozy said the French economy will expand less than the 1.75 percent his government forecast in August. To compensate for less tax revenue, he’ll announce budget cuts of between 6 billion euros and 8 billion euros within 10 days, he said. He’s also considering some tax increases.

Sarkozy pledged to trim the budget deficit as investors pressure France to improve its finances in the face of stalling growth after a two-year long European sovereign debt crisis. The move also comes about six months before Sarkozy faces presidential elections in France.

“We will have to revise and adapt our budget plan to the new reality in the next 10 days,” Sarkozy said. “It’s because of this debt crisis that we find ourselves in a situation of having to defend France’s triple-A.”

France’s Aaa credit rating is under pressure from deterioration in debt metrics and the potential for additional liabilities from the Europe’s debt crisis, Moody’s Investors Service said Oct. 17. France is among euro-region sovereigns likely to be downgraded in a stressed economic scenario, Standard & Poor’s said four days later.

French-German Axis

The premium France pays over Germany to borrow for 10 years surged to 119 basis points earlier this week, the highest since Europe’s 1992 exchange-rate crisis. The premium fell back to 92 points yesterday after European leaders agreed to bolster their sovereign rescue fund to 1 trillion euros and persuaded bondholders to accept a 50 percent cut on Greek debt.

The budget cuts Sarkozy plans are on top of the 12 billion euros in measures Prime Minister Francois Fillon announced in August.

Sarkozy said France needs to align itself as closely as possible with Germany, Europe’s largest economy.

“We have to stop looking at fiscal questions in a national way, we have to look at them in relation to Germany,” he said. “We need to reflect on convergence and competitiveness,” he said, adding that corporate and sales taxes should be harmonized across the two countries.

Sarkozy ruled out a “general” increase in France’s value added tax, leaving the door open to raising the rate on products and services that don’t currently take the full 19.6 percent rate such as food and restaurant meals.

Credible Budget

“It is vital that the government submit a credible budget that leaves some leeway to avoid announcements of new savings measures during the presidential campaign,” Pierre-Olivier Beffy, an economist at Exane BNP Paribas in Paris. The government seems to be “prepared to go after certain sacred cows” he said, pointing to possible increases in sales and corporation tax.

Both economically and politically, Sarkozy is challenged by an economy that stalled in the second quarter and that ABN Amro expects to slip into recession in coming months. French jobless claims surged to a 10-year high of 2.78 million in September, the Labor Ministry said this week.

Sarkozy also lags behind Socialist rival Francois Hollande in the election polls. The first round of the vote is set for April, with a runoff in May. Sarkozy has yet to say if he’ll seek a second term.

Hollande would win 62 percent in the second round of voting against Sarkozy, a CSA poll published on Oct. 19 showed. Another survey by BVA showed Hollande winning 64 percent to 36 percent.

Sarkozy said yesterday that he’ll announce his plans for the election early next year. “The question of my candidacy will be decided in mid-January or early February,” he said.

--Editors: Vidya Root, John Simpson

To contact the reporter on this story: Mark Deen in Paris at markdeen@bloomberg.net Helene Fouquet in Paris at Hfouquet1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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