French credit downgrade could be upgrade for candidates

PARIS -- After a credit downgrade last week, France, abuzz with speculation and uncertainty, sees effects on politicians gearing up for presidential elections this spring.
Written by Bryan Pirolli, Correspondent (Paris)

PARIS – Markets remain relatively calm in France after last Friday’s S&P credit downgrade, while the euro tries to climb back.  The downgrade, a setback for the French economy, may not be as substantial as media outlets have reported.  Still, it comes at a critical time for candidates seeking to oust President Sarkozy in the upcoming elections.

Friday’s downgrade from AAA to AA+ status by S&P showed a weakening of confidence in the French economy that could affect interest rates in the market for loans.  Two other credit indices, Fitch and Moody’s, however, have maintained the AAA status.

The French government largely downplayed the credit ratings, and French president Sarkozy even refused to answer questions about the downgrade from journalists in Madrid this Monday in light of Moody’s AAA rating.  Meanwhile, in Paris, the French prime minister called accusations from the left “media tsunamis” in an attempt to refocus the discussion in the Assembly.

According to Michael Dorsch, economics professor at the American University of Paris, the downgrade was no surprise.  “Markets are usually pretty well ahead of the ratings,” he said.

Market participants, however, have not lost confidence, despite what many thought possible.  The euro has even begun to rally since the downgrade.  “Financial panic has not ensued because of the downgrade,” Dorsch said.

The French economy is already embedded in the EU financial crisis, including failing economies in Greece and Italy.  The EU’s strongest members, France and Germany, have been at the helm to find a solution, but French banks themselves could face government bailouts in the future, Dorsch said.  There are many factors affecting the European, and consequently the French, economy to point a finger in any one direction.

Still, the downgrade seemed like perfect fuel for the Socialists to fight President Sarkozy in the presidential election this spring.  News service France 24, however, reports that the downgrades were actually helping the minority parties gain strength against the dominant Socialist party and Sarkozy’s right-wing party, the UMP. Socialist candidate François Hollande will have to tread lightly to win support, Dorsch said, while Sarkozy continues with his platform.

In response to the downgrade, President Sarkozy called together business and union leaders to address concerns yesterday.  At this "social summit" he announced a half billion euro emergency reallocation plan to reduce unemployment rates.  The measure could help create jobs and alleviate costly unemployment packages, or it could help stimulate support for an increasingly-unpopular Sarkozy.  Unemployment is just one of the many issues affecting the economy and will no doubt continue to be a major talking point over the coming weeks.

While Sarkozy has not officially announced his bid for reelection, he is expected to run for a second term.  France 24 polls show that his approval rating slipped to 34% but he maintains 25% voter support, trailing Hollande’s 28.5%.

Photo: Paris Match

This post was originally published on Smartplanet.com

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