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Where does France stand amid the financial crisis?

With the US credit rating downgrade and the European Central Bank’s move to buy Spain and Italy’s bonds, FRANCE 24 takes a closer look at France’s financial position.


When the US credit rating was downgraded for the first time in its history late last Friday, the shockwaves were felt around the world.

"All advanced economies are wavering under the strain," said Jean Pisani-Ferry, an analyst at Bruegel, a Brussels-based think-tank.

As banks and brokerages warned that rating agencies could now have other top-rated European nations in their sights, a chill wind went through Paris’s business district La Defence.

In its statement announcing the US downgrade Friday, Standard & Poor's said the deficit reduction plan passed by US Congress last week did not go far enough to tackle its massive debt. In the light of this harsh new reality and France’s own debt problems, could France be next?

What is the risk for France?

For now, it appears S&P are holding their salvos. Jean-Michel Six, Standard & Poor's chief economist for Europe, told French radio station, France Info, Sunday, that France's rating at Standard & Poor's has a "stable short-term future".

However, in a June 10 report, S&P stated: “If French authorities do not follow through with their reform of the pension system, make additional changes to the social-security system and consolidate the current budgetary position in the face of rising spending pressure on health care and pensions, Standards & Poors will unlikely maintain its AAA rating.”

Despite France’s current short-term stability in the eyes of S&P, a number of analysts and financial institutions have a negative view of France.

Paul Donovan, London-based deputy head of global economics at UBS AG told Bloomberg, “France is not, in my view, a AAA country... France can’t print its own money, a critical distinction from the US. It is not treated as AAA by the markets.”

In a note to its clients Monday afternoon, financial services firm BBH said, "France has slipped into borderline AA+/Aa1/AA+ (one notch below AAA) territory, so risks to its AAA are rising as stresses spread."

France is taking measures to tackle its debt and aims to bring its deficit down to 3% of gross domestic product by 2013 from an expected 5.7% this year. It projects the debt-to-GDP ratio to peak at 86.9% of GDP in 2012. Whether these measures will prove to be sufficient has yet to be seen.

Another potential concern is the European Financial Stability Facility. France is the second biggest contributor to the EFSF fund that safeguards financial stability in the Eurozone. “Should Spain and Italy go under; then France would, like its fellow EU members, have to contribute to the rescue," said Frederic Bonnevay, managing director of Anthera Partners, a financial services group, in an interview with FRANCE 24. Another bailout package would undoubtedly put a strain on the French economy.

Short-term benefit from US downgrade?

But some analysts argue that with US treasury bonds now rated lower than French or German bonds, the short-term impact for France could be positive.

"The short-term effects for France of turbulence in the market are marginally positive as they would make France's debt instrument local safe havens on the sovereign bond market,” said Bonnevay.

But contrary to expectations, yields on short -term US treasury bonds fell to just under 2.5% per cent Monday morning and some analysts believe it could fall as low as 2% over the coming months. The fear that the downgrade would spark an exodus from US debt has so far failed to materialise. However, the picture will become clearer in the coming days.

ECB buys up Italy and Spain's debt

With an eye to EFSF and the possibility of a further bailout for the French to stump up, Spanish and Italian bonds rallied Monday following the European Central Bank's (ECB) announcement that it was buying up bonds in the two countries.

But whether this band-aid measure will bring more than short-term relief and stem the hemorrhage remains to be seen.

France will announce its 2011 budget in September and analysts are hoping that the ruling UMP and the opposition Socialist Party will rise above their political differences to agree on a credible fiscal roadmap for the next 10 years.

Pisani-Ferry warned that "the budget must strike the right balance between fiscal adjustment and support for economic recovery", a point echoed by Bonnevay who would like to see a bipartisan agreement on a "minimum package of debt reimbursement and fiscal consolidation ie, spending cuts and/or tax hikes for the long-term".

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