Monday, June 14, 2010

Euro debt crisis: France follows Germany in cutting deficit

PARIS: France aims to cut its budget deficit by €100 billion (S$170 billion) by 2013 as fears that the euro zone debt crisis could hit its stronger members have resulted in the country having to pay higher rates to raise fresh funds from the markets.

French Prime Minister Francois Fillon said on Saturday that the aim is to bring the budget deficit down to the European Union (EU) target of 3 per cent of gross domestic product (GDP).

About half would come from slashing spending and half from increasing revenues. The Prime Minister broadly outlined where the savings would come from, including €45 billion in spending cuts and €5 billion from closing tax loopholes.

France is also counting on a rebound in the economy to bring in an additional €35 billion. 'As and when growth returns, revenues will grow once again,' said Mr Fillon.

He told UMP party members: 'We have made the pledge to bring down our deficit to 3 per cent from 8 per cent by 2013 and all our efforts will be focused on this priority.'

France's moves follow in the footsteps of Germany, Europe's powerhouse economy which has just announced an unpopular austerity programme.

With France's budget deficit hitting 8 per cent of GDP, analysts said that investors buying French government bonds want to see France make the extra effort to get its public finances under control like Germany.

German cuts of €86 billion by 2014 will put the country on course for zero deficit.

Such moves have only bolstered Germany's gold-plated reputation for financial probity and put the market spotlight on other countries, such as France, challenging them to follow suit.

In the marketplace, benchmark German 10-year government bonds currently yield 2.560 per cent, while the French equivalent pays investors 3.015 per cent.

The yield spread - the difference in return on the two bonds - is the widest since last year, reflecting how investors will pay more for the perceived lower risk of German assets in the fallout from the Greek debt crisis.

'The markets began by going over the last in the (euro zone) class, Greece, and then have gone up the pecking order, so even if you are well ranked, it finally gets to you,' said Mr Bruno Cavalier, chief economist at Oddo Securities.

It is a problem that may get worse in the run-up to the French 2012 presidential elections.

'To say, 'it will be better tomorrow', as France has done for the last 10 years is no longer possible,' Mr Cavalier said. 'Investors just won't have the patience to wait until 2012,' he added.

Besides deficit reductions, the markets will be looking carefully at key French pension reform plans to be announced next week, analysts said.

Still, even as France embarks on spending cuts, German workers are not taking what is said to be the country's biggest austerity drive since World War II lying down.

Tens of thousands of German workers took to the streets on Saturday to protest against the budget cuts and increased taxes.

Organisers said between 15,000 and 20,000 people demonstrated in Berlin, in one of the biggest protests against government reform in recent years. Police estimated that up to 10,000 people took part in protests in Stuttgart.

'The crisis is called capitalism', 'Employment, human rights, secure future for everyone' and 'Pensions should be enough to live on', protesters' banners read.


Source: Straits Times, 14 Jun 2010

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