French President Nicolas Sarkozy faces the challenge of bringing the flagging French economy under control. His management of the crisis will be a decisive factor in the April 2012 French presidential election.
REUTERS - The spiralling euro zone crisis is testing French President Nicolas Sarkozy to the limit seven months before a presidential election, forcing him to rescue a bank he bailed out in 2008, and to consider recapitalising others.
The flare-up in the bloc’s debt crisis, and fears euro zone leaders cannot stop it spreading to core members, is the single biggest issue hanging over France as it counts down to what promises to be a close-fought election next April.
Having won plaudits for his decisive handling of the 2008 crisis a year into his presidency, Sarkozy is under pressure to deliver a repeat performance—except this time France’s growth is flagging, its AAA debt rating looks fragile and its banks are in dire straits over their loans to euro zone stragglers.
The government’s joint rescue with Belgium of Franco-Belgian bank Dexia , to be finalised this week, may be only the first in a series, the success of which may be decisive for Sarkozy as he lags left-wing opponents in opinion polls.
“The crisis is a major test for Sarkozy and the indications are that it will be the dominant issue between now and election day,” said Thomas Klau, head of the Paris office of the European Council on Foreign Relations.
“With what’s happening today, people are seeing direct evidence that something is badly out of kilter. On the other hand, it shows the government is ready to act and few people would dispute that France has been one of those European governments that has offered the most leadership, so to some extent this might work to Sarkozy’s credit.”
Sarkozy, a conservative whose energetic manner brought him a tide of support in his 2007 campaign but is now derided by many as too brash, was praised for his deft management of the 2008 financial crisis, which included a bailout of Dexia.
Three years later, Dexia’s exposure to Greece has left it floundering, however, and France and Belgium have had to come to the rescue again with a plan that would break off its French municipal finance arm and put it under state control.
France is under particular pressure to step in given that towns and municipalities rely on Dexia for financing that ensures the running of public services across the country.
The plan—the first state bailout of a European bank in the euro zone debt crisis—gives weight to speculation that the French government will come to the rescue of other banks at risk from their loans to Greece, Portugual, Ireland, Italy and Spain and pummelled in recent weeks by nervous stock markets.
Sarkozy’s headache is how to square giving the markets what they are demanding, namely a hefty capital injection, while keeping debt rating agencies happy and persuading voters he is taking the best path to mend the sputtering economy.
“The whole French banking system is at risk,” said Jacques Delpla, a veteran economist who has advised French governments.
“It’s not just a liquidity crisis but a credibility crisis too because everything the French and European governments have said over the last three months has proved to be wrong. Rather than keep talking they need to resolve the problem.”
Most analysts see Sarkozy opting to inject a chunk of state capital into France’s top banks, BNP Paribas , Societe Generale , Credit Agricole and Natixis.
They say that taking a share in equity in exchange would also please those voters who see shareholding as a key to regulating what they see as banks’ profligacy.
“I think Sarkozy has close to no choice. If he implements a Big Bang (major) solution he may be applauded,” said Delpla. “If the government can buy equity at a very low price it will protect its investment and thus should protect its triple-A rating.”
Sarkozy came under fire outside France in 2004 when as economy minister he oversaw a rescue of engineering firm Alstom . He not only saved the firm, but made a big profit for the government by later selling its stake to a French group.
The Socialists, who kicked off a debate last week on whether the state should buy stakes in troubled banks, slammed the Dexia rescue on Wednesday saying it would throw good money after bad.
Sarkozy’s handle on the euro zone crisis is as crucial for the future of the single currency bloc as it is for his own hopes of winning a second term.
He broke into his summer holiday to hammer out plans with German Chancellor Angela Merkel for tighter European economic integration, and tellingly, when the Socialists vote on Sunday to pick their presidential candidate, Sarkozy will be away in Berlin for more one-on-one discussions with Merkel.
Sarkozy has shown leadership in tandem with Berlin in the current crisis, yet markets are unconvinced the bloc can avoid implosion. Moody’s slashing of Italy’s credit rating on Tuesday was a reminder of how close to the wind France is sailing.
Voters, who already blame the government for a drop in purchasing power and high unemployment, may interpret the rescue of Dexia as evidence of incompetence by leaders and may bristle at more taxpayer money being thrown at banks.
Le Monde reflected that sense of frustration in an editorial which said: “The six billion euros ($8 billion) swallowed up in 2008 by the public rescue of Dexia were thrown down the drain.”
In more fuel for cynics, Dexia’s rescue comes just weeks after it was deemed to have passed European Union stress tests.
“Today, we are held by the throat,” former Socialist prime minister Laurent Fabius told Europe 1 radio, cautioning that the Dexia plan could put France’s credit rating in peril.
Fitch Ratings France analyst Maria Malas-Mroueh told Reuters that, on the contrary, while a rise in liabilities was never good, efforts to stabilise banks could be viewed positively.
France’s high debt and deficit compared to triple-A peers, and its faltering growth, have put its rating under scrutiny.
Gallingly for Sarkozy, polls show a majority of voters would put more trust in Socialist favourite Francois Hollande, who has never been a government minister, to run the economy.
The president is grappling with stubbornly low approval ratings, and his diplomatic success in Libya has been quickly overshadowed by the left’s winning power in the Senate.
“Sarkozy is banking on the fact he has a good track record as a crisis manager and it’s dangerous to change horses on a difficult track, but the polls don’t back that up,” said Klau.
“The complexity of the crisis and deepening fears about it in France means it will be a big obstacle for his re-election.”
Date created : 2011-10-05