Sarkozy preps French for possible AAA loss

PARIS Mon Dec 12, 2011 9:10am EST

PARIS (Reuters) - President Nicolas Sarkozy prepared French voters on Monday for a possible downgrade of the country's AAA credit rating, saying as elections loom that he would reduce the public deficit without cutting salaries and pensions.

In an interview, Sarkozy told Le Monde newspaper the loss of the AAA status -- a grade that allows France to finance its debt as cheaply as possible -- could be overcome and that he would respond "with a cool head" if it happened.

Ratings agency Standard & Poor's has put France under review for possible downgrade along with 14 other euro zone countries and Moody's is also reappraising France's rating as a result of the debt market crisis in Europe, also raising the specter of a downgrade.

"It would be one more difficulty, but not insurmountable," Sarkozy said.

Sarkozy's economic track record since he took power in 2007 has been severely tested by the international financial crisis and economic downturn of 2008-2009, although he has sought to show voters that he is a safe pair of hands in efforts to deal with the subsequent debt crisis.

He badly trails in opinion polls behind his Socialist rival Francois Hollande, who is consistently tipped to beat him in the runoff of a presidential election that takes place in two rounds next April 22 and May 6.

Sarkozy said that France would stick scrupulously to its deficit-reduction targets, which aim to reduce the public deficit to 4.5 percent of gross domestic product next year and back to or below an EU-agreed limit of 3 percent of GDP in 2013.

He promised to get there with a series of belt-tightening measures that his conservative government has already announced and said he would do so without lowering wages and pensions, a move other harder-hit countries have had to take.

"If we go in this direction, it would plunge France into a recession and deflation," he said.

Many economists estimate that France is already in recession and consider that the government forecast of 1.0 percent growth next year, on which it has built its budget, is too optimistic.

Sarkozy said the ratings agencies had identified French banks as a risk to France's rating, but the European Banking Authority had deemed them to need less capital than their German counterparts.

He said this was "good news." Not a single cent of the state budget would go towards raising the 7.7 billion euros in capital the authority said French banks needed.

Sarkozy and German leader Angela Merkel were the chief instigators of an accord struck in Brussels last Friday to tighten up on pan-euro zone economic governance in response to the debt crisis, above all through greater cross-checks on budget policy.

Presidential frontunner Hollande said on Monday, however, that he would renegotiate that accord if he wins power, criticizing it for putting too much stress on austerity and not enough on economic growth.

His Socialist Party, the main opposition group in France, has also rejected Sarkozy's calls for adoption in France of a German-inspired "golden rule" that would commit the country under its constitutional law to balance its book.

"This golden rule is an important measure. It is a common sense rule," Sarkozy said.

He nevertheless indicated that it would be an issue settled after rather than before France's presidential election, which is followed immediately by parliamentary elections.

"I would have loved to see all French political groups do like the Germans and the Spanish and approve this rule by consensus without seeing it as a loss of identity," he said.

(Reporting by Leigh Thomas and Brian Love)

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