Sunday, May 30, 2010

Now France Faces Challenges to Keep AAA Rating

While much atention has being drawn to the PIIGS countries, there are even bigger countries at risk. The FT reports that France admitted today that it faces a challenge in maintaining its AAA credit rating. France, in particular, has been heavy criticized for announcing a debt reduction plan that relies too heavily on optimistic growth forecasts.

France's budget minister, Fran├žois Baroin, said the government "was committed to maintaining the rating that has helped to keep down the heavily indebted state’s borrowing costs. But the objective is challenging and it will in part condition the savings strategies that we want to have”,

Government spending will be frozen at 2009 levels, and €5B in "tax niches" will be cut. However, France still must increase savings by another €100B if it wants to meet a target of bringing the public deficit from 8% in 2010 to 3% by 2013.

Spain was downgraded this week. Downgrades increase the challenges by raising borrowing costs - that already drain budget finances.

Says the FT: "In a note published in March, Moody’s, the rating agency, said that France’s triple A rating was “not in danger”. Under most plausible scenarios, France could continue to pay its debt. However, the agency added: “The ongoing deterioration in public finances does result in an inexorable erosion of . . . the distance to downgrade.” It suggested the government’s deficit plans remained hostage to its growth forecasts".

Sarkozy has embarked on controversial reform of the country’s pension system, which accounts for close to 70 per cent of social spending, the biggest contributor to the budget deficit.

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