France loses AAA credit rating

January 13, 2012

France lost its top-tier credit rating Friday, the finance minister announced, dealing a strong blow to the country’s effort to redress its finances and to President Nicolas Sarkozy’s campaign to get reelected.

The rating cut by Standard & Poor’s, expected to be announced later Friday in New York, moved France from AAA to AA+. It was a slight drop, but one likely to prove significant as the French government turns to financial markets to borrow money on top of an already crushing debt.

Several other European nations were likely to see their S&P ratings drop, as well, according to reports circulating in Brussels and Paris. Those countries were said to include Austria and perhaps Slovakia, but not Germany, France’s main partner in the European Union.

Finance Minister Francois Baroin, appearing on a news program on the government-funded France 2 television network, said France was notified of its rating change earlier in the day, but he did not comment on the fate of the other countries reported to be affected.

The rating drop for France undermined Sarkozy’s campaign contention that, with nearly five years’ experience, he is better qualified to lead France through the continuing financial crisis than his main opponent, Francois Hollande of the Socialist Party.

Justifying cutbacks in cherished social protections over the past two years, including raising the retirement age from 60 to 62, Sarkozy had said repeatedly that his austerity policy was necessary to preserve France’s AAA credit rating. Losing it, he was said to have remarked, would be bad for the country and also a severe setback to his reelection plans.

More recently, however, as his government received reports that a rating cut was likely, Sarkozy’s lieutenants began playing down the importance of the S&P rankings. A number of officials, including members of Parliament, openly question the right of private agencies such as S&P to wield such influence, affecting the rates at which sovereign nations can borrow funds.

France, which like many of its European neighbors is heavily indebted, has estimated it will have to go to financial institutions to borrow more than $240 billion this year to finance its deficits and service its debt. In addition, the country’s economy is slipping into negative growth and is likely to remain there for the first two quarters of this year, presaging a slump in tax revenue.

Baroin, seeking to soften the impact of his news, suggested the rating adjustment would not derail Sarkozy’s policies for steering France through the crisis. “This is not good news,” he said. “We would rather not have received it. But it is not going to destabilize us.”

Similarly, a close Sarkozy adviser, Henri Guaino, disputed predictions that the rise in interest rates on government loans will automatically lead to higher interest rates for business and consumer borrowers.

“Is this going to change anything?” he asked. “At this point, nobody knows.”

But Sarkozy clearly took the news seriously. He huddled at his Elysee Palace with Prime Minister Francois Fillon and other key ministers awaiting the official announcement from New York. Officials told French reporters, however, that he did not plan to issue a statement, leaving the defense of his policies to Baroin and other ministers.

Sarkozy’s opponents, on the other hand, were quick to issue their views, even before the news was confirmed. Marisol Touraine, a Socialist Party official who handles social questions on Hollande’s campaign team, called the rating cut a sign of Sarkozy’s “failure” to get a grip on the crisis.

“The reality of [his] policies will not have been to restore confidence and restore financial equilibrium, but rather to rack up deficits and therefore to undermine the confidence that exists in our country’s economy,” she said on an all-news television channel, i>Tele.

Eva Joly, an environmentalist candidate for president, also said the rating change reveals “the failure of Nicolas Sarkozy’s policies and of his tax-cut gifts” to the rich that, she contended, pushed up the deficit level when savings were needed.

“More than ever, it is time to raise the bar,” she said. “Austerity doesn’t help at all, as we see in Greece,” where, she said, “the country is blocked up and the economy deteriorates.”

Jean-Luc Melenchon, the presidential candidate from the small Party of the Left, lashed out instead at S&P, calling in a communique for “resistance” against the firm’s “financial war against France.”

“The Central Bank must announce immediately that it will lend money to France at a low interest rate,” he said. “Failing that, we must suspend French payments to the European Union budget and cover the next amounts due with a loan forced on French banks, which have just been stuffed with money by the European Central Bank.”

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