This week international ratings agency Moody's raised the prospect of France losing its coveted triple-A credit rating and which is essential to efforts to calm the crisis in the euro zone. Martine Orange argues here that while the move by Moody's may have been predictable, the timing of the announcement has given the ratings agency a role in the forthcoming French presidential elections. Graver still, the blackmail it represents on the political debate is in danger of producing a catastrophic, irredeemable collapse of the European common currency.
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France has now in turn found itself caught up in the infernal spiral of credit rating agencies. Late Monday, Moody's announced that it was beginning a process of re-evaluation of France's AAA rating.
"The deterioration in debt metrics and the potential for further contingent liabilities to emerge are exerting pressure on the stable outlook of the government's Aaa debt rating," the agency announced in a press release. "Moody's notes that the French government now has less room for manoeuvre in terms if stretching its balance sheet than it had in 2008. France's continued commitment to implementing the necessary economic and fiscal reform measures as well as visible progress in achieving the targeted sustainability improvements will be important for the stable outlook to be maintained."
"Over the next three months, Moody's will monitor and assess the stable outlook in terms of the government's progress in implementing these measures, while taking into account any potential adverse economic or financial market developments."
The question mark that has now been raised over France's continued attribution of the top-notch rating does not come as a major surprise. It came under scrutiny following Standard & Poor's downgrading of the US credit rating. The credit spread between French and German bonds - the latter serving as a reference on the European market - has continued to grow to now reach more than 0.93%. Just as premiums continue to rise on the purely speculative Credit Default Swaps (CDS).
This loss of confidence is not only linked to the euro zone crisis, but is also the result of past government budgetary management. While once complaining that it had inherited a bankrupt state, the government of Prime Minister François Fillon has nevertheless allowed the deficit to deepen. The flouting of austerity policies were nothing but posturing. One of the most flagrant examples of this was the announcement that only one in two public employee posts would be renewed (at the end of contracts) which, while leading to a total disorganization of the State, has also allowed savings of just 700 million euros.
Since 2007, when President Nicolas Sarkozy and the Fillon government came to power, the French public debt has risen from 900 billion euros to now total 1,600 billion euros. As the French national audit office, la Cour des comptes, has noted, only one third of this rise can be attributed to the economic crisis. With a debt now equivalent to more than 85% of Gross Domestic Product (GDP), France has the most degraded public accounts of any of the triple-A-rated countries. Interest repayment on the debt, costing 47 billion euros, now represents the third largest national budgetary expense.
The euro-zone crisis threatens to further degrade the country's state of accounts. Since the beginning of this year, the Greek bailout has increased the debt burden by 15 billion euros. To that should now be added France's participation in the European Financial Stability Facility, expected to amount to about 19 billion euros, and the as yet unevaluated cost of saving the crashed Dexia bank. If the State must also in the future come to the aid of France's major banks - BNP Paribas, Société Générale and the Crédit Agricole - the debt may well become unsupportable.
Blackmailing France is a dangerous game
All of these elements have been known for many weeks, so why is it that Moody's has only now awoken to the problems? It is improbable that this was a call to order timed to coincide with the moment when the French parliament begins its examination of the public finances bill for 2012; no-one doubts that the bill has only a very relative importance, for it is the government that takes its seat next year, after the presidential elections, that will decide the true public finances programme that lies ahead.
The Moody's announcement came immediately after the final vote this weekend in the French Socialist Party primaries, and which saw François Hollande elected as the party's presidential candidate. Just as Standard & Poor's did with the US, Moody's has stepped outside of its activities as an evaluator of finances to take on a political role, inviting itself into the French presidential election.
Over recent months, a number of bankers have addressed subtle warnings to the French left that, if it came to power next year, the markets would not allow any budgetary largesse. The messages, in clear, were that there should be no illusions about ignoring the line fixed by the world of financiers, however contradictory they may be with calls for both austerity and help for growth.
What the bankers have been saying, in more or less discreet terms, Moody's has now said publicly, playing the spokesperson for the world of international finance, as is its habit. Indeed, the agency inadvertently makes no secret of the fact; in its press release, it underlined that its evaluation is part of its yearly study of France's accounts - although never before have such studies given rise to a press release of the sort.
It announced that it could place France on watch for a possible downgrade of its rating over the next three months, and may reach a definitive decision between three and five months later. That would roughly coincide with one of the most important moments for the French parliament, as reforms are prepared for after the summer recess.
However, this blackmail of France by the financial world is a most dangerous game. By giving its public warning to France, Moody's has given a licence for speculators to run riot. The tensions over French bond rates, as with CDS, are likely to deepen. The self-realising prophecies of financiers could strike once again, pulling France into an uncontrollable spiral.
If such fears turn into fact, the euro-zone crisis could enter an explosive phase, because France has played a key role in the European currency's stabilisation process. The European Financial Stability Facility is the only entity established to save the countries and banks of the euro-zone, which member states succeeded in setting up in May 2010 after two years of economic crisis (albeit without yet defining the full extent of its brief). All of its functioning mechanism is founded on the quality of the credit rating of contributing countries. Germany, France, the Netherlands and Austria all have the triple-A rating, which allows them to help those countries in difficulty through reduced-rate borrowing.
France is the EFSF's second largest contributor, after Germany. If it loses its triple-A, the EFSF would collapse, leaving the euro zone without any alternative system of support.
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