France seeks inquiry on S&P gaffe

The French government demanded an investigation of the Standard & Poor's ratings agency after the company admitted it erroneously sent an email to some subscribers suggesting that it had lowered France's flawless credit rating.

The episode briefly sowed turmoil in markets yesterday about the safety of the nation's sovereign debt.

As Europe's debt crisis starts to engulf Italy, France's president, Nicolas Sarkozy, has been striving to ensure that financial contagion will not spread to his country. A priority of his coming presidential re-election campaign is to ensure that France's AAA rating stays intact, a challenge that has grown larger as France's share of the bill for helping to contain the crisis grows larger.

After S&P reported the error, France's finance minister, Francois Baroin, quickly demanded an investigation into "the causes and eventual consequences of the error."

Within a half-hour, the French stock market watchdog said it would open one. It also notified the European financial market authority, which oversees "the professional obligations of the ratings agencies."

In a statement, S&P attributed the message to "a technical error" and affirmed that the rating was unchanged. But the yield for France's 10-year benchmark bond jumped more than a quarter-point, to 3.48 per cent, and the spread between French and German bonds of that duration reached 170 basis points, a euro-era record, Bloomberg News reported.

The erroneous S&P message went out shortly before 4pm Paris time, and the correction was issued almost two hours later, after most European markets had closed.France, together with Germany, is one of the biggest financial contributors to the European effort to contain the debt crisis.

But its own economy has slowed sharply, and could contract further in the coming months as Europe's overall economy slows, the European Commission said yesterday.

Acknowledging that the European crisis had imposed a "new reality" on France, Mr Sarkozy's ministers this week unveiled an austerity drive as part of an aggressive effort to preserve the country's top-level credit rating, including about €19 billion, or $26 billion, of proposed new budget cuts and tax increases. The government is aiming to achieve a total of $89 billion in savings by 2016.

Some analysts think even that might not be enough. "It was not good for France to have this furor today, but everyone is expecting a downward move on the rating sooner rather than later," said Evariste Lefeuvre, the chief economist for the Americas at Natixis Bank.

Any downgrade would be significant since it would raise the costs to France of servicing its debt. But it could also compromise the AAA rating given to Europe's main vehicle for bailing out troubled eurozone countries, the European Financial Stability Facility, because France is one of its main guarantors.