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Sarkozy Gives Ministers One Week Debt Deadline

Peggy Hollinger HKSCKPVIamp; Richard Milne, Financial Times

Nicolas Sarkozy, the French president, has given his finance and budget ministers one week to come up with new measures to cut France's crippling debt burden as concerns mount over prospects for growth and the country's ability to meet its deficit reduction targets.

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A final decision on the scale of new spending cuts to be included in the budget for 2012 will be taken at a meeting between Mr Sarkozy and François Fillon, prime minister, on August 24.

On Wednesday Mr Sarkozy summoned members of his government back from holiday for an emergency meeting on the current financial turmoil.

In a statement after the two hour meeting in the Elysee Palace in Paris, Mr Sarkozy said France's pledge to reduce the budget deficit from last year's 7.1 percent to 3 percent by 2013 "will be kept whatever the evolution of the economic situation".

The declaration from the highest level of state was aimed at reassuring investors who this week appeared to be questioning the stability of France's triple A credit rating, with credit default swaps - a form of investor insurance - this week hitting record highs.

However Standard and Poor's, which on Friday downgraded the US from AAA to AA+, on Monday reaffirmed the outlook for France as stable and said the country's budget policy was "well conceived".

France is also winning better terms for its debt than before the most recent crisis. Nonetheless nervousness is growing over the prospects for economic growth next year, amid a sharper than expected contraction in industrial production in June.

Unicredit warned on Wednesday that its forecast for 0.2 percent growth could be at risk. The official second quarter figures will be published on Friday.

The French government is counting on growth this year of 2 percent and a further 2.25 percent for 2012 to help it achieve its deficit reduction targets.

Though growth remains on target for this year, due to an unexpectedly buoyant first quarter, the second half decline is raising concerns about the growth targets for next year.

This could jeopardise the government's ability to bring the budget deficit to 4.8 percent of GDP by the end of 2012.

Though all three ratings agencies confirmed France's triple A rating in the spring, they have equally suggested that further spending cuts are likely to be necessary to achieve the debt reduction targets.

In response, the government is expected to increase significantly its target to save 3 billion euros on abolishing tax breaks in the next budget for 2012.

Officials refused to quantify the scale but these could reach 5 billion euros, according to some reports.

François Baroin, the new finance minister, is also reported to be weighing further reductions in the civil service, in addition to the ongoing programme whereby one in every two retirements is not replaced.

However economists remain doubtful that this will be enough in the medium term, especially if the U.S economy takes a turn for the worse.

Philippe Waechter, head of global research at Natixis Asset Management, said that France was unlikely to lose its Triple A rating.

However there was a "fragility" of confidence in French debt amid the current market turmoil, due to a lack of detail on how the government intended to implement cost savings over the next three to five years.

"We have to have a profile of what they will do and how they will do it," he said.

Government officials say they are well aware of the pressure and measures will be taken in the 2012 budget to be presented to parliament in the autumn.

Nonetheless, aggressive spending cuts could be difficult in the run up to what promises to be a challenging presidential election next year.

Moreover the government's plans to enshrine a "golden rule" in law for balanced public budgets has already become a political football in the presidential campaign.

The Socialist Party is threatening to vote against the measure, which has been cited by rating agencies as a key element reinforcing confidence in the government's determination to bring public spending under control.

Mr Sarkozy, who needs three-fifths of parliament to back the measure, on Wednesday urged all parties to overcome political divisions and vote the law through.

However the date of the vote has not yet been set, due to the uncertainty of winning enough support.