After US, France battles credit rating downgrade fears

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President Nicolas Sarkozy cut short his holiday Wednesday to announce new moves to slash Frances massive debt amid fears it might be next after the United States to suffer a credit-rating downgrade.

The right-wing leader returned from the Riviera holiday home of his pregnant pop star wife Carla Bruni to hold an emergency government meeting in Paris on the debt crisis rattling global markets.

"The head of state reiterated that the commitments to reduce the public deficit are inviolable and will be adhered to no matter how the economic situation evolves," his office said after the meeting.

Sarkozy gave his finance and budget ministers one week to come up with new ideas for keeping France's promises to slash its public deficit, it said, adding that the measures would then be decided on on August 24.

The announcement came after ministers battled this week to head off speculation that France will be the next country to lose its top AAA status after the United States was stripped of the prized credit rating last week.

Budget Minister Valerie Pecresse said Tuesday that France would "not deviate one iota" from its promise to cut its deficit from 7.1 percent last year to 4.6 percent of gross domestic product next year and 3.0 percent by 2013.

A finance ministry official said Wednesday that rumours France will be taken down a notch are "totally unfounded and the three agencies -- Standard & Poor's, Fitch and Moody's -- have confirmed there is no risk of a downgrade."

But the rumours were enough to push the Paris CAC 40 index down by more than five percent at the end of the day's trading.

Shares in French banking giant Societe Generale briefly crashed more than 20 percent on the ratings speculation and concern over its exposure to Greek debt amid renewed concern about Athen's implementation of a rescue plan.

The speculation has hit markets hard because rumours of a US downgrade last week were in the end proved correct. Such a downgrade makes it more expensive for a country to borrow money, and thus adds to the national debt.

Sarkozy's return to Paris came as the debt crisis eased somewhat after the European Central Bank bought Spanish and Italian bonds to lower their borrowing costs and hopefully avoid the need for the massive bailouts that Greece, Ireland and Portugal were given to stay financially afloat.

But investor jitters continue on fears the US and eurozone problems will spark a so-called double-dip recession.

The eurozone crisis is fuelled by fears that Spain or Italy might default on their debt and possibly spark a break-up of the currency shared by 17 countries.

EU leaders are trying to implement a July agreement aimed at beefing up the euro's defences. But many of the measures need national parliamentary approval and that process could drag on to the end of the year in some cases.

If France, the eurozone's second-largest economy, lost its AAA rating the effects 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.

Standard & Poor's, the agency that downgraded US sovereign debt last week, said this week it had no plans to take similar action against France because Paris had a clear policy to cut its deficit.

The Fitch ratings agency on Wednesday also confirmed that France was retaining its triple-A rating.

But French debt has faced pressure on the markets as the cost of credit default swaps -- insurance policies against a default -- hit record highs this week, suggesting investors were starting to look at the country more closely.

After the United States, "the other AAA-rated G7 sovereigns are all at risk of a downgrade, with the markets focusing particularly on France," said London-based Citi economist Willem Buiter.

Jennifer McKeown, senior economist at Capital, said: "Growing concerns about Frances fiscal position have underlined the breadth of the eurozones debt crisis."

The International Monetary Fund said last month that France would probably need extra action to cut its deficit in 2012 and 2013 as falling growth threatened to complicate economic recovery.

© 2011 AFP

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