France calls for UK ratings downgrade
ANGLO-French relations hit a new low yesterday as the head of France's central bank made an extraordinary call for the UK to be stripped of its gold-plated sovereign credit rating.
Christian Noyeris attack follows President Nicolas Sarkozyis cold-shouldering of David Cameron at last weekis Brussels summit, after the UK premier vetoed treaty changes to tackle the region's sovereign debt crisis.
Fears over the exposure of France's banks to Europe's strugglers has seen the nationis own triple-A rating come under threat from Standard & Poor's, but Noyer said the UK should be first to suffer at the hands of the ratings agencies.
He told a French newspaper: "A downgrade doesn't strike me as justified based on economic fundamentals. Or if it is they should start by downgrading the UK, which has a bigger deficit, as much debt, weaker growth and where bank lending is collapsing."
Noyer's cross-Channel swipe is the latest shot in a diplomatic row between the old enemies after Chancellor George Osborne's recent claims that markets were ready to turn on France - triggering fury in Paris. But bond markets have given their own much different verdict in recent weeks with Britain's benchmark cost of borrowing standing at 2.1% today, well below France's 3.1%.
A UK government spokesman said: "We have put in place a credible plan for dealing with the deficit and the credibility of that plan can be seen in what's happened to bond yields in this country."
Sarkozy, who faces elections next year, has sought to shore up France's public finances with tax hikes and spending cuts although he heavily trails his Socialist rival heavily in the polls. But France's credit quality has come under scrutiny since mid-October when ratings agency Moody's said its financial strength had been sapped by the eurozone crisis, prompting Sarkozy to unveil another AUD$18.6 billion in austerity measures to slash the country's deficit to 3% of GDP by 2013.
Even this may not be enough to save Franceis AAA rating, with Sarkozy appearing braced for the eventuality this week, telling Le Monde that the impact was "not insurmountable".
Major French banks such as BNP Paribas and Societe Generale have written off billions on their exposure to Europe's bailout cripples and struggled to raise cash in money markets.
Jonathan Loynes at Capital Economics, said: "The big difference between the two is that France is clearly much more exposed to the problems in the rest of Europe than the UK."
According to the Bank for International Settlements figures, France's banking system has more than twice the exposure of the UK to the eurozone strugglers at some 22% of GDP, Loynes added.
He said: "France is tied to the European Central Bank but we have our own policy mechanism - we can print money but the French can't do that. That is why our bond yields are lower than France - France is seen by the markets as something between the core and the periphery in markets now."