Fitch Solutions said that a rise in credit default swap prices on France and Germany may be a sign that the markets are increasingly concerned over the Euro zone's ability to prop up weaker countries in the EU.
President Nicolas Sarkozy on Wednesday ordered his Finance and Budget ministers to find new ways to prune the public deficit, as markets fretted over France's strained finances and banks following a US debt downgrade.
Sarkozy had earlier summoned his top ministers and central bank chief to emergency talks, interrupting the summer recess. He urged all political parties to support his proposal for a constitutional rule to limit future deficits which is set to be defeated in one blow if put to a special two-chamber parliamentary vote.
Budget Minister Valerie Pecresse said after the talks she would target tax loopholes in the 2012 budget. “We will not deviate one inch from our deficit-cutting targets,” she told BFM television.
France – the most indebted of the Euro zone's six AAA-rated states – has vowed to cut its deficit to 4.6% of GDP next year and 3% in 2013, down from 7.1% in 2010 and an expected 5.7% this year.
But public debt is way above the euro zone's recommended 60% of GDP ceiling at around 85% this year, and the market turmoil deals a blow to hopes investment will pick up after a bleak second-quarter.
Sarkozy asked Pecresse and Finance Minister Francois Baroin to outline suggestions to speed up deficit cuts at an Aug. 17 meeting with himself and Prime Minister Francois Fillon. A further meeting on Aug. 24 will formally agree on the steps.
“Whatever the impact of global uncertainty, of the announcement of the US downgrade by S&P, the nervousness of markets, regardless of any of these external parameters we will take the necessary measures to reach our targets,” Baroin told reporters after the meeting.
France has long looked to be a weak link among top-rated euro zone countries, with higher deficit and debt-to-GDP ratios than the other five triple-A rated nations. Its creditworthiness was thrust into the spotlight early last week, when the cost of insuring its debt against default jumped to a record, fueling speculation that its standing was at risk.
A downgrading of France would have implications that go far beyond the country. France's sovereign guarantees provide the second-largest contribution, after Germany's, to the euro-zone rescue fund, the European Financial Stability Facility. The EFSF uses its top-notch rating to borrow cheaply on the market and lend to countries under bailout programs.
President Nicolas Sarkozy's government has committed to bringing France's finances back on track in the coming years, and is due to announce details of a plan to make sure its public finance targets are met this year and next.
The government is confident it will be able to cut the deficit down from a projected 5.7% of gross domestic product this year to 4.6% in 2012 and 3% in 2013. It projects the country's debt-to-GDP ratio to peak at 86.9% of GDP in 2012--which, though high, is well below Italy's level of 119% of GDP.
Sirou said S&P is watching the French government's actions.
"We look at the commitment of public power to take action, at whether their plan is credible, sustainable" she said. "The French government is committed to a path...we'll take a look at it.
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