15th Jun 2021

IMF warns France on budget deficit targets

  • The French economy is not growing as fast as expected (Photo: Wikipedia)

The International Monetary Fund has warned France that it will have to carry out more spending cuts to ensure it reaches its deficit reduction commitments amid lower-than-expected growth expectations.

While France has predicted 2.25 percent growth for 2012, the Washington-based fund in its yearly assessment of the French economy said the economy will only grow by 1.9 percent next year.

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"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.

Ratings agency raises alarm on core EU economy

In a sign that the eurozone's ongoing debt crisis could infect its second biggest economy, US credit agency Moody's has indicated it might lower France’s triple-A rating.

French banks hit amid worries over Greek exposure

Major French banking stocks were pummelled on Monday on the back of persistent worries that Greece is on the verge of defaulting on its loans. As shares tumbled, EU leaders have scrambled to get ahead of the curve.

German Greens face reality check amid CDU gains

Armin Laschet, Angela Merkel's would-be-heir after German's September election, said he would prefer to govern with the liberals - as the Greens continued their slump in the polls.

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