France seeks to brush off S&P's downgrade

Associated Press January 16, 2012, 7:37 a.m. French President Nicolas Sarkozy secured a small boost from the Moody's rating agency Monday following a bruising downgrade last week of the way the country had been handling its economy and the wider European debt crisis. Moody's said Monday it was maintaining France's top triple A rating and stable outlook, just days after rival Standard & Poor's downgraded the country's debt over concerns that its economy and Europe's ability to get a handle on its debt woes. Markets seemed to shrug off the S&P downgrade, which had been expected for weeks. Many analysts had predicted that France wouldn't be overly punished for it, since the amount it pays to borrow was already among the highest of countries with the top-notch rating. Though Friday's downgrades, which hit several countries that use the euro, seemed to be having little immediate effect in the markets, they served as a reminder that the eurozone still has a long way to go to deal with its two-year debt crisis. This week's first hurdle was cleared as France easily sold about (euro) 8.6 billion ($10.9 billion) of debt with very short maturities. Just over half of that was in 12-week bonds, for which investors demanded an interest rate of 0.165 percent, up from 0.023 percent at an auction two weeks ago. The country also sold 25-week and 51-week bonds. There were no direct comparisons for those bonds in recent weeks, but the interest rates demanded were in the range of similar recent auctions. On the secondary markets, where the issued bonds are later traded openly, the interest rate on France's benchmark 10-year bond fell, indicating investors feel France remains a relatively good bet. There are more government auctions in Europe this week, including longer-term offerings from France on Friday, so the debt crisis will never be too far from investors' minds. Sarkozy will be hoping matters calm down as he readies for what look set to be tough elections in April. In Madrid, after visiting with Spanish King Juan Carlos ahead of his meeting with new Prime Minister Mariano Rajoy, Sarkozy did not address the downgrade but said, "Spain and France have a lot to do so that Europe can get out of the repeated crises that it have been in for the last three years." Spain was also downgraded Friday by S&P. The king said he's confident France and Spain will help Europe find a way out of the crisis, saying the two nations are "struggling together for the advance of a unified and prosperous Europe in solidarity that confronts the crisis with strength." Back in Paris, Sarkozy's finance minister, Francois Baroin, defended his country's record. "Investments are rarely without risk," he said at a conference in Paris on Monday. "But if there's an investment without any risk, it's the investment in the sovereign debt of our country, bonds among the most secure in the world." Sarkozy's budget minister Valerie Pecresse said she was optimistic that S&P's knockdown would not lead to a rise in the country's borrowing costs. A short-term French bond auction later on that day is seen as a test of the impact of the downgrade. In its announcement, Moody's cited the French economy's overall strength but said bleak growth prospects in France and the region present "risks to the French government's fiscal consolidation plans." Moody's had said in October it was putting France on review, as Sarkozy and other European leaders struggled to find solutions to Europe's protracted debt crisis. Moody's said Monday it "will update the market during the first quarter of 2012 as part of the initiative to revisit the overall architecture of our sovereign ratings in the EU." "France, like other eurozone sovereigns, may face a number of challenges in the coming months. The need to provide additional support to other European sovereigns or to its own banking system cannot be excluded. In that case this could give rise to significant new (contingent) liabilities for the government's balance sheet," Moody's warned. Moody's notes the government has less room to maneuver than during the 2008 meltdown. "The domestic and external economic growth outlook presents significant risks to the French government's fiscal consolidation plans." The S&P move was especially brutal for France, one of the world's biggest economies and a financier of bailouts for smaller, poorer eurozone countries. Sarkozy has yet to speak publicly about the downgrade, leaving his government ministers to try to calm the public. Pecresse and the prime minister promised to continue cost-cutting reforms, despite criticism from the left — and S&P itself — that austerity measures alone could crimp growth. Sarkozy's challengers for the presidency have seized on the downgrade as what they call evidence that his policies are wrong-headed and ineffective. Sarkozy hasn't announced his candidacy but is near certain to seek a second term in two-round elections in April and May. He trails Socialist Francois Hollande in polls and is facing increasing pressure from far-right candidate Marine Le Pen and a centrist, Francois Bayrou. It will be a bruising battle for Sarkozy, a dynamic leader who has a strong international profile but is widely disliked at home. Leftists say he has coddled the rich, while many of those who supported him in his 2007 campaign say he hasn't fulfilled his promises.