France's downgrade a sign of Europe's worsening crisis
Given the marginal rise in French bond spreads after Moody’s stripped the country of its AAA-status—S&P did this way back in January—the move in itself hasn’t set off any alarm bells even though the credit rating firm has promised more rating cuts if the country didn’t undertake necessary reforms. It is the combination of events over the past fortnight, however, that gives the downgrade a more sinister overtone, ironically on the day Europe’s finance ministers are in Brussels trying to plug a 15-billion euro gap in Greece’s budget.
France has, on its own, done enough to deserve the ratings cut. Over the past four quarters, it has grown just 0.1%, a killer when its debt exceeds 90% of GDP, the latter a result of the fact that the country has not balanced a single budget since 1974, The Economist tells us. François Hollande, not surprisingly given his election spiel was about ending austerity, appears in no hurry to fix things. Meanwhile, he has slapped a 75% tax rate on high-income earners (only Indira Gandhi’s 98% tax betters this), nothing has been done to cut the 35-hour week, there has been a partial rollback on increasing the retirement age, and doubling the capital gains tax got Bernard Arnault, the richest man in France, applying for Belgian citizenship.
The worsening French situation comes on top of the eurozone slipping into double-dip recession—it contracted 0.3% in Q4 2011, 0% in Q1 2012, 0.2% in Q2 and 0.1% in Q3, with BNP Paribas now betting the eurozone will remain in recession until Q3 2013. While the IMF and eurozone finance ministers agreed to give Greece another two years to meet the bailout targets—it now needs to reach a primary surplus in 2016 and not 2014—there has been a spat between the IMF and eurozone officials, which is why the next tranche of loans haven’t been released yet. All of which spells trouble since Germany will now be less keen to take on the burden it has to. The Germany-backed plan, critical if the PIIGS are to recuperate, meanwhile, has run into its own set of troubles with the UK threatening to block the formation of a single eurozone banking regulator—central to the German plan—after talks on the EU’s budget collapsed on November 9. Italy looks like it could be in primary surplus by next year, but Spain’s budget is in trouble with the 2012 deficit target almost double the original 4.4% of GDP. The deluge doesn’t look that far way.