Fillon to Unveil Austerity in French Bid to Save AAA Rating

France's Prime Minister Francois Fillon
France's Prime Minister Francois Fillon. Photographer: Simon Dawson/Bloomberg

Prime Minister Francois Fillon will unveil austerity measures today to keep the budget gap in check as France’s economy slows and its top credit rating comes under pressure amid Europe’s sovereign-debt crisis.

“We cannot allow France’s deficit to widen” as “that would mean our debt would have to increase and we have reached a level of indebtedness that can’t continue,” Foreign Minister Alain Juppe said in an interview on Europe1 radio yesterday. Not adapting the 2012 budget to reflect slowing growth could lead to “catastrophe.”

Fillon will announce the measures at a press conference in Paris at noon following a Cabinet meeting. President Nicolas Sarkozy has pledged to trim as much as 8 billion euros ($11 billion) from the budget amid investor pressure on France to improve its finances. Today’s plan comes on top of 12 billion euros in spending cuts unveiled in August, as Sarkozy seeks to shield the nation from the debt crisis about six months before he faces elections.

France’s economic growth will slow to about 1 percent next year rather than the 1.75 percent previously predicted, Sarkozy said on Oct. 27. The government aims to cut the deficit from this year’s estimated 5.7 percent of gross domestic product to 4.5 percent in 2012, 3 percent in 2013 and a balanced budget in 2016, Juppe said. “We’ll stick to this target whatever happens,” he said of next year’s goal.

Yields Rise

French borrowing costs are climbing as contagion from the debt crisis spills over into Spain and Italy, core economies of the euro region. The yield on 10-year French bonds reached 3.12 percent on Nov. 3. That pushed the yield difference, or spread, with the German securities to 133 basis points, the most since the euro was introduced in 1999. The yield was at 3.066 percent as of 10:07 in Paris.

“Additional austerity measures are key, not only for the French economy and its debt dynamics, but also for national and international politics,” Thomas Costerg, European economist at Standard Chartered Bank in London, said in an e-mail. Sarkozy “cannot afford to lose the AAA rating ahead of the national election next year.”

France’s Aaa credit rating is under pressure from worsening debt metrics and the potential for additional liabilities from Europe’s sovereign crisis, Moody’s Investors Service said Oct. 17. France is among euro-area nations likely to be downgraded in a stressed economic scenario, Standard & Poor’s said Oct. 21.

France must retain its top rating, Juppe said. To do so, the nation will have to break “with the culture of deficits,” Bank of France Governor Christian Noyer told Journal du Dimanche in an interview published over the weekend.

Deficit Details

Fillon said on Nov. 5 that France’s deficit will be cut by 20 percent in 2012 from 113 billion euros this year through one of the most “rigorous” budgets since World War II. The shortfall will narrow by 45 billion euros next year with half the savings coming from spending cuts and the rest by boosting revenue, including plugging tax shelters, Fillon said.

The measures will be structural, balanced and fair, Finance Minister Francois Baroin told RTL radio in an interview last night. The government’s “adapting” to the slowing global economy and doesn’t expect a recession in 2012, when “we’ll do everything to reach our growth target,” he said.

Possible Moves

France will seek to raise 1 billion euros through an exceptional tax on companies as part of the austerity plan, La Tribune reported, citing unidentified people. The plan will also target health insurance savings of about 500 million euros, the newspaper said.

“We expect the French government to focus more on spending cuts rather than tax hikes,” Costerg said. “Risks to the government forecast of 1 percent GDP growth next year are mostly to the downside, which means more painful decisions could be taken down the road.”

The austerity measures include a new rate of value-added tax for industries such as restaurants and a new levy on large companies, according to French press reports. The government won’t scrap an annual holiday, contrary to some media reports, Baroin said yesterday, adding that the issue as well as the 35-hour work week will be part of the presidential campaign.

Sarkozy last month ruled out a “general” increase in France’s VAT, leaving the door open to raising the rate on products and services that don’t currently take the full 19.6 percent rate, such as restaurant meals.

“For most French people, the VAT isn’t a good tax because we pay it several times a day and it feels unfair,” Juppe said. “The VAT has benefits. It doesn’t tax investment and is favorable to exports, which aren’t taxed whereas imports are.”

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