France aims for more public deficit cuts

PRESIDENT Nicolas Sarkozy ordered his finance and budget ministers tofind new ways to prune the public deficit, as markets fretted over France’s strained finances and banks following a US debt downgrade.

Shares in French banks — among the most exposed to Italian and other peripheral eurozone government debt — slumped in afternoon trade as fears about the currency bloc’s debt crisis moved back to the forefront of investors’ concerns.

Sarkozy — who played a leading role in frantic diplomacy over the weekend aimed at halting two weeks of market turmoil — 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 eurozone’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.

Yet 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 August 17 meeting with himself and Prime Minister Francois Fillon. A further meeting on August 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.

Standard & Poor’s (S&P) has reaffirmed France’s AAA rating and said that as things stand its outlook is stable, but markets remain concerned that French banks are among the most exposed to a worsening of Europe’s government debt crisis.

“The pressure was there before the US downgrade. France is the eurozone’s second leg. If it stumbles, the bloc will really start to limp,” said Natixis economist Jean-Christophe Caffet.

Sarkozy was at the centre of a July 21 agreement among eurozone leaders to give the EFSF rescue fund the power to buy sovereign bonds on the secondary market and aid Greece with a new multi-billion euro bailout.

With the opposition Socialist Party on board, parliament should pass the resulting adjustments to the 2011 budget at special sessions on September 6 and 7 — tacking an extra €15 billion onto France’s public debt by 2014, equivalent to adding 0.75 percentage points to the debt-to-GDP ratio.