* EU Commission subjecting France to enhanced monitoring
* Markets so far indulgent though fiscal targets seen at
By Leigh Thomas
PARIS, March 6 France is facing pressure to
deliver on long-promised, deep budget savings in the next couple
of weeks to keep the increasingly strained faith of its EU
partners, bond markets and ratings agencies.
Unimpressed with French efforts so far, the European
Commission warned on Wednesday that Paris would miss its
deficit-reduction targets in the absence of further action.
The European Union's executive arm singled out France (and
Slovenia) for stepped-up monitoring to check that President
Francois Hollande's government finally makes promised reforms
and budget savings.
Crucially, some investors who until now have given France
the benefit of the doubt are saying its status as a top issuer
at the core of the Europe's bond market is not guaranteed.
"The margins for manoeuvre are non-existent for potential
disappointments," Franck Dixmier, head of fixed income in Europe
for Allianz Global Investors, which is the 30th biggest private
holder of French debt according to Thomson Reuters data.
"If France disappoints ... its status in the markets will
deteriorate," he told Reuters.
The Commission has already given France two extra years -
until 2015 - to bring its deficit in line with an EU-limit of 3
percent of gross domestic product on condition the euro zone's
second-biggest economy is reformed in depth.
The government currently aims to reduce the public deficit
to 2.8 percent of GDP next year from what it estimates will be
3.6 percent this year. The Commission however sees the deficit
falling to only 3.9 percent next year from 4.0 percent this
With that target at risk after tax revenues fell short of
estimates last year, the government increasingly says what is
important is simply that the deficit is falling, budget savings
are made and big reforms are carried out.
Despite record low popularity ratings, Hollande's government
will have to detail in the coming weeks exactly how it plans to
wring just over 50 billion euros ($68.7 billion) savings from
the budget in 2015-2017.
Further savings are also needed to finance Hollande's plans
for a cut in payroll tax on companies as part of what he has
dubbed a "responsibility pact" aimed at recovering lost
FINANCES UNDER STRAIN
Though officially the government considers its target for a
deficit of 3 percent of GDP next year is not a lost cause, both
the Commission and the national audit office have voiced strong
doubts it will be met.
The Cour des Comptes audit office said last month that the
Finance Ministry tends to overestimate tax revenues, which
frequently leaves a hole in the budget. It could be as big as 4
billion euros this year.
Already last year the central state's budget deficit was 2.7
billion euros bigger than expected because tax revenues fell
short of hopes.
With final figures not due until late March, that shortfall
raises the risk that the overall deficit for 2013 was worse than
the 4.1 percent of GDP that the government had targeted.
Any overshoot this year would have to be absorbed by 7
billion euros in rainy-day reserves built into the budget,
leaving no room for unbudgeted spending in case of emergencies.
"The fiscal policy flexibility in France is limited which
together with the policy challenges imply a continued risk of
missing fiscal targets," Moody's France analyst Dietmar Hornung
said on a conference call.
PATIENCE WEARING THIN
Though France has already been stripped of its AAA credit
rating, bond investors continue to indulge France, attracted to
the liquidity offered by its bonds and richer yields than those
on low-risk German alternatives.
Investors have over the last year demanded only about half a
percentage point extra yield to hold French bonds instead German
bonds, down from nearly a point and a half during the darkest
days of the euro zone crisis in 2011 and 2012.
Strong appetite for French debt was evident in a long-term
bond auction on Thursday which saw investors put in bids worth
more than twice the 8 billion euros sold.
France can count on a solid investor base with a large chunk
of the 65 percent of French debt in foreign hands owned by other
countries' central banks, looking for liquid assets where they
can park foreign reserves.
Nonetheless, the French central bank and the audit office
have voiced concerns that investors' patience may ultimately run
out if France puts off reining in its deficit yet again.
"If it gives the impression that it never meets its targets,
that it puts them off indefinitely, its creditworthiness with
markets and general credibility could be put into question,"
Bank of France Governor Christian Noyer said last month.
The national audit office estimates a one-percent increase
in France's borrowing costs would add 2 billion euros in debt
servicing costs annually in the first year and 15 billion euros
after 10 years.
That would come on top of the 52 billion euros in debt
servicing costs France already forks over to its creditors each
year, which the audit office points out is more than annual
budget for the justice, foreign and culture ministries combined.
"Winning investors confidence is a long process that takes
time, but there's nothing faster than losing market," Allianz's