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France’s Sarkozy: ‘We must respond with calm’ to downgrade

By Barbara Kollmeyer, MarketWatch –

MADRID — French President Nicolas Sarkozy brushed aside on Monday the recent downgrade of France’s triple-A credit standing, saying rating agencies don’t set the economic policy of France and instead urging a focus on boosting growth and competitiveness to bring Europe out of the crisis.

At a news conference following a Madrid meeting with Spanish Prime Minister Mariano Rajoy, Sarkozy gave brusque and at times defensive responses to questions on Friday’s downgrade of several eurozone nations by Standard & Poor’s.

“I don’t understand your question. … Could you please ask a question that I can understand?” said Sarkozy, in response to questions about the downgrade.

He eventually answered that “it is not credit-rating agencies that set economic policies of our respective countries.”

“We must respond with calm and put it into perspective. In my view, these decisions don’t change anything. We have to reduce spending and improve competitiveness,” he said.

“The economic policy isn’t set on a day-to-day basis, and I don’t intend to take into account what these agencies say. We have to take into account the real economy,” Sarkozy said. “The deficit is too high and growth is too low, and that is affecting the eurozone as a whole.”

Sarkozy also pointed out that while France was downgraded by one agency, another agency said it plans to retain its triple-A rating for France. Moody’s Investors Service said Monday that France’s triple-A rating remained under review, but also said the stability of that rating is at growing risk from external and internal pressures.

In addition to France, Austria also lost its triple-A rating from S&P on Friday, while Portugal’s debt status was cut two notches to junk and Italy and Spain’s ratings were also cut two notches.

Sarkozy stressed the importance of reform implementation by eurozone members. “If Spain defaulted, we would all be adversely impacted. If Italy fails, we would all be negatively impacted. The French economy is intertwined with the Spanish and Italian economies. You have to feel a sense of solidarity,” he said.

He added that the French and German economies are so intertwined that if there were a problem in France, there would be a problem in Germany as well. He said spending cuts alone will not solve Europe’s issues.

“Europe is facing an unprecedented crisis, which requires that we should reduce our deficits and find a path to new growth by solving Europe’s competitiveness problems,” said Sarkozy.

He said France had made some key decisions already on its deficit and would “surpass commitments” it has already made.

For his part, Rajoy said that while Spain was not pleased with the S&P downgrade, it was happy with last week’s bond auction, which saw solid demand and lower borrowing costs.

Rajoy, whose center-right conservative party swept to an overwhelming victory in November’s general election, said it’s important that Spain acts quickly with its program of reforms. “My government is pursuing its own path, reducing public deficits, implementing structural reforms, and reorganizing the financial system,” he said.

He said the prior government had taken steps toward overhauling the country’s financial structure but that those steps needed to go further. “I cannot give you any details, but the general objectives are exactly the same we fought for during the election,” he said.

The Spanish parliament recently approved the government’s new austerity measures amounting to 8.9 billion euros ($11.3 billion) in spending cuts. The measures include income tax increases, which the government has said are severe but necessary.

Rajoy said if the government had not acted quickly, it would have sent a “horrible message that Spain was standing still and not willing to solve its problems.” He said the measures will help Spain recover its position, spur economic growth and create employment and wealth.

“I believe it’s still possible to reduce public spending and not increase taxes more in the future, but obviously I must say in the same breath that nothing is forever in life. What I would like to see is a lowering of taxes. I can’t see this right now but perhaps a little bit later,” he said.

Both leaders expressed their support for a tax on financial transactions.

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