Sarkozy, Lagarde Will Discuss France's Deficit-Reduction Strategy Tomorrow
President Nicolas Sarkozy meets Finance Minister Christine Lagarde tomorrow to step up preparation for next month’s budget as Moody’s Investors Service warned France to keep public debt under control.
Tomorrow’s gathering at Fort Bregancon on France’s Mediterranean coast comes as Sarkozy readies a bill to increase the retirement age for presentation Sept. 7 and the 2011 budget, which is slated to go to lawmakers two weeks later.
Lagarde and Prime Minister Francois Fillon, who will also attend, have emphasized the need for spending cuts since June when the premium France pays to borrow over Germany surged due to concerns about the government’s budget shortfall. Sarkozy has promised to cut the deficit to 6 percent of output next year and 3 percent by 2013 from about 8 percent this year.
“In France, as in other triple-A countries, a rising stock of public debt means that debt dynamics have become more sensitive to market confidence,” Moody’s wrote in a quarterly report. The “tailwinds” that are helping keep borrowing costs down depend on credible fiscal plans and “cannot be assumed to continue forever,” Moody’s said.
While the increase in France’s government debt since the financial crisis has been “significant,” the country should remain within the Aaa range, Moody’s said. Sarkozy called the meeting before the rating company published its report on Aug. 17, the Finance Ministry said today.
Bond Spread
The spread between French and German 10-year government bonds jumped to 55.6 basis points on June 8, the highest in more than a year. The gap has since fallen back as Fillon and Lagarde pledged to freeze government spending for three years and now stands at 29 points, in line with its average for the past year.
French 10-year bonds currently yield 2.66 percent, compared with 3.04 percent for the U.K., 2.67 percent for the U.S. and 2.37 percent for Germany.
France’s year-old economic expansion accelerated to 0.6 percent in the three months through June from 0.2 percent in the first quarter, national statistics office Insee said last week. Still, that pales in comparison to the 2.2 percent growth in gross domestic product registered by neighboring Germany in the second quarter.
Lagarde predicts the French economy will expand 1.4 percent in all of 2010. She said July 6 that the Finance Ministry is reconsidering its prediction for growth to be 2.5 percent in 2011 as it prepares the budget.
“It will be very difficult to meet the budget commitments,” Eric Chaney, chief economist at Axa SA in Paris, said in a telephone interview. “There is high uncertainty about the growth rate of the European economy, which adds to the pressure. The longer it drags out the tougher cutting spending becomes because we get closer to the next election” in 2012.
Retirement Age
Sarkozy has pledged to lift France’s minimum retirement age to 62 from 60 and the age at which full benefits kick in to 67 from 65, rolling back a social benefit handed out by one of his predecessors, Francois Mitterrand, in the 1980s.
All major labor unions are protesting the change. The Confederation Generale du Travail, the largest, described the reform as a “brutal” and unprecedented “social regression” on June 16.
For investors, the pensions overhaul looms large because it holds out the possibility of unlocking future growth by expanding the labor force.
“Pension reform is materially relevant for debt dynamics,” Moody’s said. “It would partially stimulate labor supply, hence potential output, thereby partly compensating for the negative output record during the global crisis. This, in turn, would expand the government’s tax base and strengthen its balance sheet.”
To contact the reporter on this story: Mark Deen in Paris at markdeen@bloomberg.net
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