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Zero growth adds to France debt pressure

AFP · 12 Aug 2011, 17:03

Published: 12 Aug 2011 17:03 GMT+02:00

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France came under fresh pressure Friday to convince turbulent markets it can deliver on debt targets and keep its prized triple-A credit rating after data showed economic growth had skidded to a halt.

The bleak news came after a dramatic week that saw French banks pummelled in the markets as President Nicolas Sarkozy cut short a holiday to order deeper cuts and call a eurozone crisis summit with German Chancellor Angela Merkel.

The government insisted that French economic fundamentals remained "solid" and that the country was still on course to reach its official target of 2.0 percent growth for the year.

Sarkozy's promises to prune France's public deficit - the shortfall between government spending and revenue - are based on the 2.0 percent forecast but the latest data support analysts' forecasts that the goal is too optimistic.

The zero growth in the second quarter of 2011 came after a robust 0.9 percent in the first, the statistics agency INSEE said, noting that the main cause was a drop in household consumption.

The gloomy figures complicate Sarkozy's bid to slash France's deficit from 7.1 percent of gross domestic product last year to 5.7 percent this year, 4.6 percent in 2012 and 3.0 percent, the EU ceiling, by 2013.

"With the economy stagnating and (presidential) elections coming up next spring, it will be extremely difficult to implement the aggressive austerity measures that are needed to convince markets that the government finances are on a stable footing," said Jennifer McKeown at Capital Economics.

The zero growth data "may add to investors fears of a possible downgrade of

French sovereign debt," she said.

After the European Central Bank stepped in this week to buy government bonds of Italy and Spain, lowering their borrowing costs, the market turned its fire on France as rumours swirled about the solidity of its triple-A credit rating.

French ministers have battled all week to head off speculation that France will be the next country to lose its top credit status after Standard and Poor's stripped the United States of the prized rating a week ago.

The three leading rating agencies all said they had no plans to downgrade France but speculation intensified as the week progressed.

If France, the eurozone's second-largest economy, lost its AAA rating the effect would stretch far beyond its borders.

France provides the second-largest contribution, after Germany, to the eurozone's temporary rescue fund, the European Financial Stability Facility, which enjoys an AAA rating to borrow at low rates and lend to states under bailout programmes.

Markets are wondering whether France and Germany can continue to underwrite the debts of troubled eurozone countries without losing their own top credit ratings and thus falling victim to the crisis themselves.

The crisis started in Greece, which had to be bailed out along with Ireland and Portugal, and is now fuelled by fears that Spain or Italy might default on their debt and possibly spark a break-up of the 17-nation currency zone.

Story continues below…

Shares in France's biggest banks were battered this week on fears about their exposure to Greek debt.

The rollercoaster ride on global stock markets continued Friday as nervous investors but a short-selling ban in key European markets appeared at least to dampen volatility, allowing some gains.

France, Belgium, Spain and Italy, all under intense pressure from the financial markets, on Friday slapped a ban on the speculative practice of short-selling bank stocks to combat "false rumours" that have destabilised them.

The move echoes steps taken at the height of the global financial crisis sparked by the collapse of US investment bank Lehman Brothers in 2008.

Dealers said that whatever was done on the regulatory side, there was little the authorities could do about the underlying poor economic fundamentals which the debt crisis only makes worse.

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