French President Nicolas Sarkozy on Wednesday ordered his finance and budget ministers to find new ways to prune the public deficit as markets fretted over the country's strained finances and banks in the wake of a US debt downgrade.
Shares in French banks — among the most exposed to Italian and other peripheral Eurozone government debt — tumbled in afternoon trade as fears about the currency bloc's debt crisis moved back to the forefront of investor concerns.
Sarkozy, who played a leading role in frantic diplomacy over the weekend aimed at halting two weeks of market turmoil, had earlier summoned his top ministers and central bank chief to emergency talks, interrupting the summer recess.
He urged political parties to support his proposal for a constitutional rule to limit future deficits which is set to be defeated if put to a special two-chamber parliamentary vote.
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Budget Minister Valerie Pecresse said after the talks she would target tax loopholes in the 2012 budget.
"We will not deviate one inch from our deficit-cutting targets," she told BFM television.
France — the most indebted of the Eurozone's six AAA-rated states — has vowed to cut its deficit to 4.6 per cent of GDP next year and 3 per cent in 2013, down from 7.1 per cent in 2010 and an expected 5.7 per cent this year.
Yet its public debt, at around 85 per cent this year, is well above the Eurozone's recommended 60 per cent of GDP ceiling and the market turmoil deals a blow to hopes investment will pick up after a bleak second quarter.
Sarkozy asked Pecresse and Finance Minister Francois Baroin to outline suggestions to speed up deficit cuts at an upcoming August 17 meeting with Prime Minister Francois Fillon. A further meeting on August 24 will formally agree on the steps.
"Whatever the impact of global uncertainty, of the announcement of the US downgrade by S&P, the nervousness of markets — regardless of any of these external parameters, we will take the necessary measures to reach our targets," Baroin told reporters after the meeting.
The three major rating agencies reaffirmed France's AAA rating on Wednesday, and said its outlook was stable, but markets remain concerned that French banks are among the most exposed to a worsening of Europe's government debt crisis.
"The pressure was there before the US downgrade. France is the Eurozone's second leg. If it stumbles the bloc will really start to limp," said Jean-Christophe Caffet, an economist at Natixis.
Volatile trading in shares of Societe Generale and other French banks on Wednesday appeared to be inflamed by a perfect storm of rumours fuelled by Twitter postings, market blogs and a now debunked newspaper report.
Shares of Societe Generale plummeted as much as 23 per cent before trimming some losses to end 14.7 per cent lower on the day. BNP Paribas dove 9.5 per cent.
Sarkozy was at the center of a July 21 agreement among Eurozone leaders to give the EFSF rescue fund the power to buy sovereign bonds on the secondary market and aid Greece with a new multibillion-euro bailout.
With the opposition Socialist Party on board, parliament should pass the resulting adjustments to the 2011 budget at special sessions on September 6-7 — tacking an extra €15 billion (Dh77 billion) onto France's public debt by 2014, equivalent to adding 0.75 percentage point to the debt-to-GDP ratio.
Lawmakers on the left, however, have vowed to block Sarkozy's proposal for a constitutional "debt brake" if it goes to a two-chamber vote in coming weeks, part of the jockeying for political position ahead of a 2012 presidential election.
The Socialists oppose tampering with the Constitution, noting the reform would have limited impact as numerical deficit ceilings would be set by particular governments anyway.
Markets, however, see the constitutional move as symbolic of France's commitment to fiscal prudence and some analysts fear that rating agencies could use a failure of the initiative to put France on negative outlook, or on review for a possible downgrade.