Sarkozy to bet on growth reforms as AAA slips away

Sat Jan 14, 2012 9:00am EST
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By James Regan

PARIS (Reuters) - The loss of France's much-prized triple-A credit rating three months from elections that will likely hinge on the handling of the economy is a bitter blow for French President Nicolas Sarkozy, who had made the top-notch grade a badge of honor.

Sarkozy is likely to use the fact the Standard & Poor's downgrade was not two notches, as happened to some other eurozone countries, as a way of drawing a line in the sand as he prepares a raft of reforms focused on growth.

Stuck with some of the lowest popularity ratings of any French president, Sarkozy rushed through two sets of austerity measures late last year in a last-ditch attempt to save the triple-A rating and keep down borrowing costs.

But since the start of the year, having apparently resigned himself to a downgrade, Sarkozy has switched his focus to growth, vowing to overhaul welfare financing, company labor charges and job flexibility, with plans for a so-called "Social VAT" to fund welfare and a tax on financial transactions.

Prime Minister Francois Fillon played down the impact of the downgrade on Saturday but said it underscored the need to press on with its reform plans focused on competitiveness and growth.

"This decision is a warning that should not be turned into a drama any more than it should be underestimated," Fillon said. "Because the drifting off course of our public finances in the last 30 years is a major handicap for growth and employment, as well as for our national sovereignty."

Sarkozy -- who thrives on handling a crisis -- meets union leaders and employers for talks on January 18 and has vowed to come out with some kind of deal on reforms.

The French downgrade came as S&P cut a swathe of euro zone countries, blaming insufficient policy measures by the bloc's leaders. While it leaves France a notch below Germany, which kept its AAA status, the ratings of Italy, Spain, Portugal and Cyprus were downgraded by a costly two rungs.   Continued...