France braces for credit ratings cut

FRENCH leaders are girding for the loss of the nation’s top credit grade, with the central bank governor taking a swipe at Britain as he called debt-rating companies “incomprehensible and irrational”.

Standard & Poor’s said last week it may lower France by two levels in a eurozone downgrade stemming from the failure of the region’s leaders to arrest a debt crisis that began in Greece in 2009 and now presents the biggest threat to the world economy.

“A downgrade doesn’t strike me as justified based on economic fundamentals,” Bank of France governor Christian Noyer told Le Telegramme, a newspaper based in Brittany. “Or if it is, they should start by downgrading Britain, which has a bigger deficit, as much debt, more inflation, weaker growth and where bank lending is collapsing.”

A cut by S&P’s or Moody’s Investors Service, which said this week it will review European ratings, may complicate Europe’s efforts to stem the crisis by threatening the rating of the region’s bailout fund.

The European Financial Stability Facility, which funds rescue packages for Greece, Ireland and Portugal partially with bond sales, owes its AAA rating to guarantees from the six top-rated euro nations. A downgrade may prompt investors to demand higher rates on the fund’s debt and force greater action by the ECB.

“A French downgrade could come sooner than envisaged,” said Thomas Costerg, an economist at Standard Chartered Bank in London. “There could be a domino effect on confidence, not to mention the sizeable impact on the EFSF.”

French President Nicolas Sarkozy has tried to minimise the potential impact of a downgrade, calling it “not insurmountable” in an interview published in Le Monde on Monday, three days after an all-night summit in Brussels that he had said was the last chance to save the euro.

Sarkozy, who has sought to protect his government’s creditworthiness by announcing tax increases and spending cuts, has attempted to position himself for a 2012 re-election campaign as the most credible candidate on economic matters.

Sarkozy trails his main rival, Socialist Party candidate Francois Hollande, by about 14 points in voting intention for the second round of the election.