No new austerity measures ahead

Economy minister promises no more cuts despite credit-ratings agency warning on poor public finances

6 December 2011

ECONOMY Minister François Baroin has promised there will be no "third round" of austerity measures after credit-rating agency Standard and Poor's said France was set to lose its top-level AAA status.

News that France could be marked down - by as much as two notches to AA - and that Germany and 13 other countries were also likely to be downgraded came just as President Sarkozy and German chancellor Angela Merkel were unveiling plans for fiscal union in the euro-zone.

Standard and Poor's said the 15 countries had a "one-in-two" chance of having their ratings downgraded - which would mean their borrowings would cost much more. The downgrade would come if the countries did not reach a deal on resolving the euro crisis at Thursday's EU summit.

European financial leaders had "failed to make progress" in "controlling the spread of the financial crisis, which may reflect structural weaknesses in the decision-making process within the eurozone and European Union".

S&P singled out France, saying the euro crisis had enfeebled public finances. It feared "potential repercussions from what we see as a worsening of political, financial and monetary problems at the head of the euro zone". It also disagrees with France's economic forecasts, suggesting France would at best achieve 0.5% growth in 2012 - half what the Sarkozy government forecast.

There were also fears over French banks as the impression that they were financially secure hurt their ability to get new financing abroad and increased the possibility of the need for "additional capital injections" from the state.

Baroin said France had done "everything necessary" to protect the French economy and there was no need for further measures.

The accord between Sarkozy and Merkel would mean balanced budgets would be the “golden rule” for eurozone states; with large deficits leading to sanctions. However, Sarkozy did not get backing for his plan to allow the European Central Bank to get involved.

However, any marking down of the euro-zone countries' credit ratings would have a severe impact on euro rescue plans as the funding costs would rocket.

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