France vows deficit action over AAA threat

The right-wing president broke off his vacation at the Riviera home of his pregnant pop star wife Carla Bruni to hold an emergency government meeting in Paris on the debt crisis rattling global markets.

"The head of state reiterated that the commitments to reduce the public deficit are inviolable and will be adhered to no matter how the economic situation evolves," his office said after the meeting.

Sarkozy asked his finance and budget ministers to come up with new ideas for sticking to France's deficit-reduction promises and these measures will be decided on on August 24, the president's office said.

The announcement came after government ministers sought earlier this week to head off speculation that France might be the next major country to lose its top AAA status after the United States lost the coveted credit rating last week.

Budget Minister Valerie Pecresse said France would "not deviate one iota" from its promise to cut its deficit from 7.1 percent last year to 4.6 per cent of gross domestic product next year and 3.0 percent, the EU limit, by 2013.

Sarkozy's return to Paris came as the debt crisis eased somewhat after the European Central Bank began buying Spanish and Italian bonds to lower their borrowing costs but investor jitters continue on fears the US and eurozone problems will spark a new recession.

The eurozone crisis is fuelled by fears that Spain or Italy might default on their debt and possibly spark a break-up of the currency shared by 17 countries.

EU leaders are trying to implement a July agreement aimed at beefing up the euro's defences. But many of the measures need national parliamentary approval and that process could drag on to the end of the year in some cases.

Standard & Poor's, the rating agency that downgraded US sovereign debt last week, said this week that it had no plans to take similar action against France because Paris had a clear policy to cut its deficit.

But French debt has faced pressure on the financial markets as the cost of credit default swaps, which are insurance policies against a default, hit record highs this week suggesting that investors were beginning to look at France more closely.

The International Monetary Fund said last month that France would probably need extra action to cut its public deficit in 2012 and 2013 as falling growth threatened to complicate economic recovery.

It said that without further efforts France was set for a public deficit of 3.8 percent in 2013, above both the EU limit and the government's forecast.

The French central bank this week forecast that France would grow by only 0.2 percent in the third quarter.

The debt crisis has turned public deficits into a major issue in the run-up to next year's presidential election in France, which has not produced a balanced budget in three decades.