France seeks to brush off S&P's downgrade

[January 16, 2012]  PARIS (AP) -- French President Nicolas Sarkozy secured a small boost from Moody's rating agency Monday following a bruising downgrade last week of the way the country had been handling its economy.

Moody's said Monday it was maintaining France with a top AAA rating and stable outlook for its debt. Rival agency Standard & Poor's, more downbeat about the prospects for France and Europe as a whole, stripped France of its long-cherished triple A rating last Friday.

In early trading, markets appeared to brush off S&P's decision to cut the credit ratings of nine European countries, including France. Though the downgrades late Friday had been expected, they served as a reminder that the 17 countries that use the euro as their currency still have a long way to go to get a handle on the two-year debt crisis.

Europe's economies will likely remain the focus of attention across markets all week as a number of bond auctions are due at the same time as Greece tries to clinch a debt-reduction deal with its private investors.

Sarkozy's budget minister Valerie Pecresse said Monday 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."

The rating agency detailed the strengths of the French economy, but noted that the country's debt levels have deteriorated because of the "global economic and financial crisis" and were now among the weakest of all AAA countries.

"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."

Sarkozy meets later Monday with Spain's new Prime Minister, Mariano Rajoy, whose country was also downgraded Friday by S&P.

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 said on Europe-1 radio Monday that she doesn't expect "mechanical consequences" of the downgrade because France has "credibility" and is a "sure value."

She noted that the United States didn't see its borrowing costs spike after last August's decision by Standard & Poor's to strip it of its AAA rating. Like France, the U.S. is rated AA+.

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.

[Associated Press; By ANGELA CHARLTON]

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