IMF warns France on budget deficit targets

"Under (IMF) staff's current projections, achieving the deficit target of three percent of GDP by 2013 requires further measures."

As tax rates are already among the highest in Europe, France will have to reduce spending, said the IMF, citing healthcare and pension spending in particular.

French president Nicolas Sarkozy has pledged to get the budget deficit down to 5.7 percent of GDP this year, 5.6 percent next and within the EU limit of 3 percent in 2013.

He is under pressure to meet the commitments having last week spearheaded, along with Germany, a second bailout for Greece in order to contain the eurozone debt crisis.

The IMF also underlined the importance of cutting medium-term spending for maintaining France's strong credit rating.

"France cannot risk missing its medium-term fiscal targets given the need to strengthen implementation of the (EU) Stability and Growth Pact and keep borrowing costs low by securing France's AAA-rating," the report said.

But with presidential elections next year, Sarkozy is likely to have a difficult juggling act between keeping the electorate sweet and maintaining his budget commitments.

Cyprus downgrade

Meanwhile the markets continue to view key eurozone countries with a jaundiced eye even after last week's deal which attempted to draw a line under the crisis.

The borrowing costs of Greece, Italy and Spain rose on Wednesday following comments by German finance minister Wolfgang Schauble that the more flexible arrangements agreed by EU leaders for the use of the €440bn eurozone rescue fund would not amount to a blank cheque.

In a letter to German MPs, obtained by Reuters news agency, he stressed the "strict conditions" needed for allowing the European Financial Stability Facility to purchase bonds on the secondary market.

On the same day, Standard and Poor's rating agency, one of the three main international agencies, put Greece's credit rating further into junk territory, putting it just two grade above default status, saying that EU plans to get Athens' economic house in order would put the country into "selective default".

This followed a move by Moody's rating agency on Monday to downgrade Greek debt to one notch above default status.

There was bad news for Cyprus too on Wednesday.

Citing the "increasingly fractious domestic political climate'' and Cypriot banks' exposure to Greece, Moody's downgraded the Mediterranean island's credit rating by two notches and warned a further cut was possible.

The downgrade raised the spectre of Cyprus becoming the fourth eurozone country to need a bailout, following Greece, Ireland and Portugal.