France and other eurozone members could lose their top credit ratings from the Standard & Poor’s agency. Germany and the Netherlands would likely be exempt from a downgrade but the two could not on their own sustain the high rating of Europe’s temporary bailout fund which is designed to prevent the continent’s spiraling debt crisis from spreading to other nations.
Besides Austria and France, which could lose their AAA status, Finland and Luxembourg, both now recognized as highly creditworthy, may be in danger of losing this appraisal. The former are seen as being at greater risk because their banks are heavily exposed to peripheral and Hungarian bonds respectively. If Greece, for instance, would default on its debt obligations, French banks may have to request government support to prevent going under. This would exacerbate France’s fiscal shortfall which few analysts expect to improve substantially in the short term.
The same dynamic applies to Austria’s economy which is otherwise healthy and expanding thanks to a dependence on German imports and exports but vulnerable to turmoil in neighboring Hungary where the nationalist government of Viktor Orbán could need soon European financial support to continue to pay its bills.
Austria’s deficit amounted to 4.4 percent of gross domestic product last year and is likely to be reduced to 3 percent in 2012. France’s, by contrast, was nearly €96 billion in 2011 or 7.1 percent of GDP. The size of the county’s public debt is equivalent to 84 percent of annual economic output.
The government in Paris has introduced billions worth of austerity measures in reaction to the eurozone crisis but they have mostly been composed of tax increases which will reduce the state deficit in the short term but inhibit business activity and growth in the long run. Necessary entitlement and labor market reforms have been postponed until after this summer’s presidential and parliamentary elections. If the socialists manage to oust the conservatives in these votes, structural reforms may be even less likely.
After Germany, France is the second-largest economy in the single currency area and therefore the second-largest guarantor of the European Financial Stability Facility, a €440 billion bailout mechanism that currently boasts a AAA rating from the three major American credit rating agencies. If the vehicle is to preserve that status, member states may have to increase their guarantees which is politically sensitive, especially in Finland, Germany and the Netherlands which are perceived as the strongest economies in the eurozone but weary of financing the deficit spending of other countries.