Sarkozy Struggles to Convince Markets on Deficit Cuts as Shortfall Narrows

President Nicolas Sarkozy is struggling to convince investors he can cut France’s budget gap amid concern about the spread of Europe’s debt crisis, even as the government’s deficit narrowed for a third month in April.

The central government deficit fell 22 percent to 56.2 billion euros ($66.9 billion) from 71.6 billion euros a year earlier, the Paris-based Finance Ministry said in an e-mailed statement today. French bonds fell, with the premium investors demand to buy French 10-year debt over comparable German bonds reaching a 15-month high of 57 basis points.

Sarkozy, who pledged a year ago to avoid “austerity,” is now seeking to reassure markets that finances will improve in coming years. The yield premium on French bonds has doubled in the past week on concern that the sovereign-debt crisis that began in Greece is spreading to core-euro countries like France.

“The government has made some good noises, but for the time being we’re lacking material proof” that the deficit will be reduced, said Laurence Boone, an economist at Barclays Capital in Paris.

France forecasts a total deficit, including local governments and the social-security system, of 8 percent of gross domestic product this year before trimming it to 6 percent in 2011 and within the European Union limit of 3 percent in 2013.

Sarkozy’s Announcement

Sarkozy said on May 20 that he intends to freeze spending for three years and will consider a constitutional amendment introducing binding deficit limits. He is also trying to push through an overhaul of the pension system that will include increasing France’s retirement age.

The announcement was a “step in the right direction,” Fitch Ratings said. At the same time Fitch, which rates France’s debt AAA with a stable outlook, urged Sarkozy to spell out his deficit-cutting plans to “further underpin creditworthiness.”

The government, which will begin allocating departmental budgets next month, has yet to give specifics of its deficit- reduction plans for the coming year.

By contrast, German Chancellor Angela Merkel’s government announced 81.6 billion euros of spending reductions and tax increases yesterday while U.K. Prime Minister David Cameron told voters to brace for cuts that will affect “every single person” when his government presents an emergency budget later this month. Italy, Spain, Portugal and Greece have also announced further budget cuts in recent months.

Soaring Spread

The doubling of the spread between French and German bond yields “is in part the impact of Germany’s budget adjustment,” Boone said. “And reflects the fact that France’s track record is more mixed.”

France’s debt load of 77.6 percent of GDP last year was the fourth largest in the 16-member currency region, after Italy, Greece and Belgium, according to European Commission data.

The commission predicts France will have a deficit of 7.5 percent this year, the fifth largest among euro countries. The U.K., which isn’t in the euro, currently expects a deficit of about 11 percent.

In April, French tax revenue rose to 81.6 billion euros from 70.2 billion euros a year earlier and 92.5 billion euros in 2008. Spending climbed to 130.6 billion euros from 127 billion euros, the Budget Ministry said today.

“The impact of the crisis is fading but it is far from having disappeared,” said Dominique Barbet, an economist at BNP Paribas in Paris. “The government’s goal of a not larger than 8 percent of GDP total deficit remains possible to reach, despite a highly likely slippage of social security accounts.”

To contact the reporter on this story: Mark Deen in Paris at +33-1-5365-5066 or markdeen@bloomberg.net

To contact the editor responsible for this story: John Fraher at +44-20-7673-2058 or jfraher@bloomberg.net.

To contact the reporters on this story: Mark Deen in Paris at markdeen@bloomberg.net.

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