January 13, 2012 / 7:05 PM / 8 years ago

UPDATE 3-France's loss of AAA badge a blow to Sarkozy

* Impact on borrowing costs seen limited

* Downgrade timing a blow for Sarkozy ahead of election

* Opposition: downgrade shows Sarkozy’s policies inadequate

* Government downplays impact, vows more reforms

By Nicholas Vinocur and Catherine Bremer

PARIS, Jan 13 (Reuters) - France lost its triple-A credit rating with Standard & Poor’s on Friday, putting it a notch below Germany in a blow to President Nicolas Sarkozy three months from a presidential election.

S&P cut France to AA+ from AAA as it downgraded a swathe of euro zone countries, blaming insufficient policy measures by the bloc’s leaders to tackle worsening strains.

The agency also changed the French rating outlook to negative, which indicates there is at least a one-in-three change the rating will be lowered in 2012 or 2012. Germany’s rating was left unchanged and its outlook was upgraded to stable.

Finance Minister Francois Baroin rushed to emergency talks with Sarkozy and other ministers as France was notified of the move and appeared on the evening TV news even before S&P’s announcement to try and play down the impact.

He said the conservative government would simply push harder for structural reforms to boost economic growth and jobs.

“It’s a downgrade, a one-notch change,” Baroin told France 2 TV, noting S&P was punishing several euro zone states for goverance problems that contributed to the bloc’s debt crisis.

“Clearly, this is not a disaster. It is as if you asked a student who got 20 of 20 in school for a very long time whether dropping to 19 was a disaster. No, it’s an excellent grade.”

Long factored in by markets, economists expect the French cut will have a limited impact on government borrowing costs, but the timing is dire for Sarkozy, who risks being ousted by Socialist Francois Hollande in a two-round election in April and May and had made preserving the AAA a point of pride.

“S&P is absolutely right. France is paying the price of 30 years of irresponsibility in public finances,” Fabrice Seiman, head of French investment fund Lutetia Capital told Reuters.

Opposition parties seized on the news, calling it evidence that Sarkozy was not fit to run the country’s economy.

Socialist Party head Martine Aubry said Sarkozy would now be remembered as “the president of the French downgrade”. Far-right leader Marine Le Pen, third in polls behind Hollande and Sarkozy, said the move would inflate the hefty public debt.

“The downgrade of the French triple-A is punishment for five years of social, economic and political erosion by Nicolas Sarkozy and his government,” tweeted Marisol Touraine, a key aide of Socialist challenger Francois Hollande.

Centrist presidential hopeful Francois Bayrou spoke of a double downgrade.

“It’s a downgrade of our sovereignty that will affect our country’s reputation, and it’s a downgrade in relation to Germany, which means our situation in Europe will suffer symbolically and politically,” he told i<Tele television.


France has been fearing a downgrade for months, as faltering growth has left its public finances looking vulnerable to shocks from the banking sector or debt-laden euro zone peripherals.

Sarkozy, who is battling with some of the lowest popularity ratings any French president has suffered, spent most of 2011 saying he would fight tooth and nail to defend the rating and rushed through two big budget cut packages late in the year.

He changed tack in December, days after S&P put the ratings of 15 euro zone countries on review, saying that a downgrade would not be “insurmountable” and that he would react coolly to it.

Shifting his focus to growth, he is vowing to overhaul welfare financing, company labour charges and job flexibility, issues he will discuss with unions and employers next week.

But critics doubt that meaningful reforms can be pushed through between now and the first election round on April 22.

Baroin noted that Paris is borrowing at the lowest rates since the euro’s creation. He said the 2012 budget factored in 10-year borrowing rates of 3.7 percent, above current market yields of 3 percent, leaving ample wiggle room.

French benchmark 10-year bond yields have risen to over 3 percent since flirting with record lows in September around 2.5 percent, but are still at historically low levels.

As the S&P news leaked on Friday, the French 10-year yield spread over German Bunds widened 10 basis points to 131, but was well below levels near 200 bps in November.

France has 1.3 trillion euros of outstanding debt and will issue up to 178 billion euros in medium and long-term paper this year, net of buybacks, to cover its deficit and expiring debt.

The head of the public debt management agency, Philippe Mills, said in November that a rise of 120-150 basis points in borrowing rates would cost 2.5 to 3.0 billion euros per year.

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