Finance Minister Francois Baroin said today that France was headed for a slowdown and not a recession and that the government was doing everything to preserve its AAA credit rating. However, he did rule out further austerity measures.
France came under heavy fire on global debt markets yesterday, pushing the premium on its borrowing costs over benchmark German debt to euro era highs, amid fears that the troubled currency bloc's second largest economy was being sucked into a debt spiral as its economy slowed.
"We are expecting a slowdown, but not a recession," Baroin told French television. "We are doing everything to maintain our credit rating, to borrow more cheaply," he added.
Baroin said a revised 2012 budget unveiled this month would allow the government to cope with a slowdown next year without resorting to further austerity measures, even if growth came in at 0.5% - half the official forecast. "There will not be a third austerity plan," the minister said.
With anxiety mounting in markets, Prime Minister Francois Fillon announced a second austerity drive on November 7 comprising €65 billion of tax hikes and budget cuts by 2016, including 18.6% this year and next.
Credit ratings agency Moody's has said that it is evaluating the outlook on France's AAA. In that context, an error by Standard & Poor's last week mistakenly announcing the downgrade of France sent shockwaves through markets.
Many investors are already factoring in France losing its AAA rating, which could complicate fund raising for the euro zone's EFSF bailout fund, whose own AAA rating relies on those of six top-grade countries underpinning it.
Budget Minister Valerie Pecresse told Europe 1 radio today that France would start paring back expenditure in 2011, a year earlier than planned.
Baroin said a commitment to cut France's deficit from an estimated 5.7% of GDP this year to an EU target of 3%of GDP by 2013 was sacrosanct.
Meanwhile, the gap between German and French 10-year borrowing rates, a critical measure of tensions at the heart of the euro zone, widened to a new record today.
The spread increased to 192.6 basis points, with the French 10-year borrowing rate rising sharply to more than 3.7%, meaning that France has to pay about twice as much as Germany to borrow.
