France sees fresh economic woes as economy stalls

12th August 2011, Comments 0 comments

France came under fresh pressure Friday to convince turbulent markets it can deliver on debt targets and keep its prized triple-A credit rating after data showed economic growth had ground to a halt.

The bleak news came at the end of a dramatic week that saw French banks pummelled in the markets as President Nicolas Sarkozy cut short a holiday to order deeper cuts and call a eurozone crisis summit with his German counterpart.

The government insisted that French economic fundamentals remained "solid" and that the country was still on course to reach its official target of 2.0 percent growth for the year.

Sarkozy's promises to slash France's public deficit are based on the 2.0 percent target but the latest official data support analysts' forecasts that his goal is too optimistic.

The zero growth in the second quarter of 2011 came after a robust 0.9 percent in the first, the statistics agency INSEE said, noting that the main cause was a drop in household consumption.

The gloomy figures will complicate Sarkozy's bid to keep his promises to his European partners to slash France's deficit from 7.1 percent of gross domestic product last year to 5.7 percent this year, 4.6 percent in 2012 and 3.0 percent -- the EU ceiling -- by 2013.

"With the economy stagnating and elections coming up next spring, it will be extremely difficult to implement the aggressive austerity measures that are needed to convince markets that the government finances are on a stable footing," said Jennifer McKeown at Capital Economics

McKeown added that the zero growth data "may add to investors fears of a possible downgrade of French sovereign debt."

After the European Central Bank this week stepped in to buy government bonds of Italy and Spain, lowering their borrowing costs, the market turned its fire on France as rumours swirled about the solidity of its triple-A credit rating.

French ministers have battled all week to head off speculation that France will be the next country to lose its top credit status after the United States was stripped of the prized rating last week.

The three leading rating agencies all said they had no plans to downgrade France but speculation intensified as the week progressed.

If France, the eurozone's second-largest economy, lost its AAA rating the effect would stretch far beyond its borders.

France provides the second-largest contribution, after Germany, to the eurozone's temporary rescue fund, the European Financial Stability Facility, which enjoys an AAA rating to borrow at low rates and lend to states under bailout programmes.

Markets are wondering whether France and Germany can continue to underwrite the debts of troubled eurozone countries without losing their own top credit ratings and thus falling victim to the crisis themselves.

The crisis started in Greece, which had to be bailed out along with Ireland and Portugal, and is now fuelled by fears that Spain or Italy might default on their debt and possibly spark a break-up of the 17-nation currency zone.

Shares in France's biggest banks were battered this week on fears about their exposure to debt issued by Greece, which last month was promised a new bailout package worth 109 billion euros to help it avoid defaulting.

Stock markets remained volatile Friday but in narrower ranges after wild swings this week as France was dragged deeper into the debt quagmire.

France, Belgium, Spain and Italy, all under intense pressure from the financial markets, on Friday banned the speculative practice of short-selling stocks to combat "false rumours" that have destabilised them.

The move echoes steps taken at the height of the global financial crisis sparked by the collapse of US investment bank Lehman Brothers in 2008.


© 2011 AFP

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