ANALYSIS-French reprieve on deficit may be short-lived
* France concedes will miss 2013 deficit target
* Bond markets unfazed for now, await next moves
* EU set to review member state efforts on Feb. 22
PARIS, Feb 14 (Reuters) - France's admission that it will miss its 2013 public deficit target looks to have escaped punishment for now, with bond markets still granting it cheap borrowing and the European Union's fiscal enforcers signaling leniency.
But the reprieve will be short-lived unless President Francois Hollande can quickly spell out how his government plans to keep a bigger promise to balance the budget by the end of his mandate in 2017 while the economy flirts with recession.
Prime Minister Jean-Marc Ayrault let slip on Wednesday what has been an open secret for months: the slowdown will mean that France will fail to cut its public deficit from 4.5 percent of output in 2012 to 3 percent this year.
For now, financial markets are giving Paris the benefit of the doubt and are hoping the shortfall will not be too glaring. The yield on France's benchmark 10-year bond has barely budged from just above record lows of two percent, and the spread with German debt is likewise unchanged.
The greater concern is that, nine months into his presidency, Hollande has still not revealed how he plans to find further savings which could turn Socialist allies, trade unions and the street against him.
"No reform that would bring significant savings beyond 2013 can as yet be identified," France's state finances watchdog, the Court of Auditors, noted in its annual report this week, urging new measures to be "rapidly taken and clearly documented".
For Hollande, this may be a watershed moment.
Wringing an unprecedented 38 billion euros of savings from public finances so far has been hard enough. But to go further he must cut into the flesh of French state spending - at 56 percent of output second only to Denmark's in the Western world.
PATH OF LEAST RESISTANCE
In a letter to EU finance ministers posted on his website on Wednesday, EU Economic and Monetary Commissioner Olli Rehn said he would give countries extra time to meet deficit targets in times of weak growth as long as they proved they were trying.
With data showing the French economy shrank by 0.3 percent in the last quarter of 2012, that could let France off the hook when the European Commission on Feb. 22 reviews efforts by EU states to chip away at their debt mountains.
France argues that its structural deficit - the part not affected by swings in the economy - is set to fall as planned to just 1.6 percent of output this year, a performance it believes should convince Rehn of its good faith.
But it recognises that it will still be judged largely on what the headline deficit outcome is.
"It will all depend on how far away we are from 3 percent," said one French government source, acknowledging that Paris would also have to show it has a credible plan to keep debt-cutting in motion in return for getting some leeway.
The EU, the International Monetary Fund and many independent analysts are forecasting that France's 2013 deficit will come in around 3.5 percent, with economic growth this year roughly half the 0.8 percent the government is forecasting.
Until now, Hollande has chosen the path of least resistance by favouring tax hikes on business and the wealthy over spending freezes to secure three quarters of the fiscal effort so far.
But amid howls of protest that he risks scaring off investment, his government has committed to avoid further tax rises, meaning the only way from now on is chopping expenditure.
SHOWDOWN WITH THE LEFT
The government has already dared to cut a few billion euros out of lavish subsidies which pass from central state coffers into local administrations across the country where expensive and often wasteful mini-fiefdoms have been built up.
Planned reforms of pensions and social benefits later this year give Hollande a further opportunity to revamp a welfare model which is among the most generous in the world.
Moreover the French economy is in a better shape than those of Spain and Italy, whose governments have already embarked on tough austerity programmes.
But in a country where no government has balanced a budget in the past 38 years, any major cost-cutting would require a hardiness that has eluded presidents both left and right.
Hollande's political capital has been boosted by the success so far of France's military intervention to oust al Qaeda-linked rebels from the north of its former African colony Mali.
This week's passage through the lower house of parliament of a bill allowing gay marriage - an emblematic project of his Socialist Party - may also give him some room to make moves that would otherwise be unpalatable to the left.
But with unemployment rooted around 13-year highs above 10 percent, the public mood for further austerity is limited.
The suicide by self-immolation of a jobless man who set fire to himself outside a state employment agency in the western city of Nantes on Wednesday was seized upon by labour groups as proof that many French are already living in misery.
The powerful CGT union is increasingly showing its teeth, enraged at the thousands of jobs cuts due to fall as part of the restructuring of auto-maker PSA Peugeot Citroen, which this week reported a record 5 billion euro loss for 2012.
So far, efforts to mobilise protests have had only limited success. The tens of thousands of public workers who took to the streets for one march last month marked a drop from the mass protests France has often seen in the past.
But left-wingers within the Socialist Party are beginning to campaign more openly against the austerity push. The "Now The Left" grouping of high-profile councillor Emmanuel Maurel and Senator Marie-Noelle Lienemann this week urged Hollande to abandon deficit targets and embark on a dash for growth.
"Hollande has been fairly lucky so far," said one Socialist Party insider. "But this is where the discussion is heating up."
(Additional reporting by Brian Love and Jean-Baptiste Vey. Editing by Mike Peacock)