Bloomberg News

Sarkozy Dealt Blow 100 Days Before Vote With Loss of AAA

January 17, 2012

(Updates with French note auction in fifth paragraph. See {EXT4 <GO>} for more on the European debt crisis.)

Jan. 16 (Bloomberg) -- President Nicolas Sarkozy has fewer than 100 days before French elections to overcome the blow dealt by Standard & Poor’s decision to strip the country of its AAA credit rating for the first time.

After saying in October that he would do everything possible to retain the top credit rating that one of his advisers called a “national treasure,” the cut to AA+ may hurt Sarkozy’s reputation for economic management and diminish his stature in discussions to end the European debt crisis, said political analysts such as Emmanuel Riviere, a pollster at TNS Sofres in Paris.

“Sarkozy has built his whole strategy on being the most credible candidate on the economy, on being the surest leader in a crisis,” Riviere said. “That line is getting harder and harder to hold. It’s getting harder to say that he’s an equal in the Franco-German couple, that he’s a power at European summits.”

Trailing Socialist challenger Francois Hollande in the polls, Sarkozy called on French voters yesterday to back his “economic reforms” in his first comments since the downgrade, saying “the crisis can be overcome on condition that we have the collective will to do so.” Although Hollande stepped up attacks on the president, he too may have to water down campaign promises in response to the rating change.

Muted Reaction

Warned by S&P of a possible French downgrade on Dec. 5, the action on Jan. 13, failed to spark a selloff in French bonds. The yield on French 10-year debt fell 4.2 basis points to 3.01 percent. In the first test of S&P’s impact, France sold 8.59 billion euros ($10.9 billion) in bills today, with yields falling on all maturities of paper sold.

Investors now demand a premium of about 127 basis points to hold 10-year French bonds instead of benchmark German bunds. That’s down from one week ago, although its three times the spread of one year ago.

History suggests reaction may be limited. Ten-year yields for the nine sovereign borrowers that lost their AAA ratings between 1998 and the U.S.’s downgrade in August rose an average of two basis points in the following week, according to JPMorgan Chase & Co.

Sarkozy’s government tried to play down the importance of the downgrade or deflected blame by pointing to decades of state excesses.

“It’s not a catastrophe,” Finance Minister Francois Baroin said. “It’s like a pupil who had 20 out of 20 for a very long time and now has a 19. It’s still an excellent grade.”

Not ‘Insurmountable’

France, which hasn’t had a budget surplus since 1974, has been over-extended for decades, Trade Minister Pierre Lellouche said on Europe 1 radio.

“We’re paying the price for 30 years of carelessness, of redistributing money we didn’t have,” he said.

Sarkozy, 56, had sought in recent weeks to prepare voters for a setback, saying the loss of the top credit rating wouldn’t be “insurmountable.”

He said he would focus on growth rather than worry about rating companies. France, according to forecasts by national statistics office Insee, has already entered a recession.

S&P, which first evaluated French sovereign debt in June 1975, giving it a AAA, attributed its downgrade of the nation and eight other euro-area countries to “insufficient” measures by policy makers to address the systemic risks to the region.

Downgraded President

“It was a black day for Sarkozy,” said Bruno Cautres, an analyst at Cevipof, a political research center in Paris. “He has lost the AAA he had pledged to defend. Sarkozy is weakened. His voice will carry less weight when he tells other nations to make efforts or to follow him.”

S&P’s action have made Sarkozy, who attempted to protect France’s creditworthiness by announcing tax increases and spending cuts in August and November, more vulnerable to opposition attacks on his economic policies.

“The downgrade creates a sentiment of humiliation,” said Jean-Marc Ayrault, who heads the opposition Socialist Party group in France’s National Assembly. “Sarkozy is now the president that downgraded France.”

Sarkozy has the backing of 23.5 percent of voters, just ahead the 21.5 percent for anti-euro candidate Marine Le Pen, leader of the nationalist National Front, according to an Ifop poll for Paris Match magazine published last week. Socialist Party candidate Hollande leads with 27 percent.

Ifop surveyed 942 voters online between Jan. 10 and 13. The margin of error is about 2.8 percentage points.

Le Pen

Speaking from the French territory of Guadeloupe, where he’s campaigning, Hollande said, “It’s not France that has been downgraded, it’s a policy, it’s a strategy, it’s a team, a government, a president.”

French voters go to the polls on April 22 and then again on May 6 to cast their ballots in a runoff between the two leading candidates from the first round.

Analysts agree that the downgrade poses problems for Hollande too.

“For Hollande, the question is whether he’ll be able to stick to the Socialist program as it is set out,” TNS’s Riviere said. “It reduces his room for maneuver.”

The real beneficiary is likely to be Marine Le Pen and other candidates who peddle anti-European, anti-free market views, such as former Socialist Jean-Luc Melenchon. Le Pen could even surpass Sarkozy in support, said Cautres.

‘L’economie, C’est Moi’

“The economic pessimism is serving mainly one candidate: Marine Le Pen,” he said. Le Pen, 43, is the only major candidate who wants to pull France out of the euro.

The downgrade “tears apart all those who have defended and imposed the single currency,” she said. “This is the first step in the spiral of the euro-zone explosion.”

Jean-Marie Le Pen, Marine’s father, made it to the second round in the 2002 election, knocking out the Socialist Party candidate and paving the way for Jacques Chirac’s landslide victory weeks later. Marine Le Pen was the only one of the top three candidates to gain in an LH2 poll published yesterday.

Support for her rose 3.5 points to 17 percent, while backing for Sarkozy slipped 2.5 points to 23.5 percent and slid 1.5 points for Hollande to 30 percent.

“Sarkozy made a tactical error by turning the AAA into a political argument to justify the pension reform, the budget cuts, to attack the Socialists,” said Laurent Dubois, a professor at Paris’s Political Studies Institute. “Two years ago, no one had heard of the AAA or Standard & Poor’s. If they know about it now it’s because Sarkozy made it an issue. To borrow from Louis XIV, for Sarkozy it was ‘L’economie, c’est moi.’ Now he’s paying the price.”

--Editors: Vidya Root, Alan Crawford

To contact the reporters 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: Vidya Root in Paris at


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