ANALYSIS:The French government had in recent days hoped a rating downgrade could be averted, writes RUADHÁN Mac CORMAIC
IT MAY have been well flagged, but the news that France had finally lost its place in the premier club of Europe’s most creditworthy states still took Paris by surprise. President Nicolas Sarkozy summoned senior ministers to a crisis meeting at the Élysée Palace to plot a response, opposition politicians scrambled to convene press conferences, and a group of left-wing protesters marched on the Paris office of Standard Poor’s, the agency that cut the triple-A rating by a notch.
The French government had in recent days allowed itself to hope a downgrade could be averted. It noted Spain and Italy had managed to borrow at lower rates and drew comfort from new figures showing France’s deficit was lower than predicted. Further encouragement came from the credit rating agency Fitch, which said it would leave the triple-A in place through 2012.
SP has dealt the French government a heavy blow. Optimists in Sarkozy’s UMP party will argue we should not expect a major increase in France’s cost of borrowing because investors had already priced in a downgrade. But their eyes will be firmly fixed on next week’s bond yields. Every additional 100 basis points on France’s interest rate roughly equates to an extra €3 billion in yearly funding costs, which is enough to knock budget plans badly of course. The finance ministry doesn’t have much room for manoeuvre – it has introduced two austerity packages since August and, with the economy stalled and unemployment rising, has set itself against any further cuts.
Meanwhile, there was a powerful symbolic resonance to last night’s news – Europe’s second-biggest economy has been relegated, and with Berlin having been spared by SP, the eastward drift in power within the Franco-German couple is now beginning to look more tangible.
The economic and diplomatic effects of the downgrade could turn out to be much less painful for Sarkozy than the political fallout, however. In one fell swoop, SP has snapped a central plank of Sarkozy’s economic strategy just 100 days before French voters choose their next president. He has nobody to blame for that but himself.
At every opportunity, Sarkozy has made retaining the triple-A rating one of the major selling points of his policies – he used the spectre of a downgrade to justify his landmark pension reform, his austerity packages and his push for a budget-balancing “golden rule”. By last month, ministers had begun to condition the public for bad news. “It wouldn’t be a disaster,” said foreign minister Alain Juppé. But it’s already clear that losing the top-notch rating will have a bigger domestic impact in France than it did in the US last summer.
Recent polls showed Sarkozy lagging behind his socialist rival François Hollande – albeit by a narrowing margin – with the far-right National Front leader Marine Le Pen closing the gap in third place.
As the instant flow of indignant responses showed, last night’s news will give the opposition potent ammunition for the battle ahead, and requires Sarkozy to rethink strategy in a policy area long regarded as his biggest strength.
And yet it’s also conceivable the downgrade could be a double-edged sword for Hollande. He has come under pressure for making spending promises his opponents say are untenable. A bad week in the markets for France may now force him to revise his manifesto and face further wrath on his vulnerable left flank.
“If we lose the triple-A, I’m dead,” Sarkozy said last October, according to Le Canard Enchaîné. He has 100 days to prove himself wrong.