France is to issue long-term bonds on Thursday in the first test of its market credibility in the wake of Standard & Poor's decision to strip the country of its cherished triple-A rating.

"/> France is to issue long-term bonds on Thursday in the first test of its market credibility in the wake of Standard & Poor's decision to strip the country of its cherished triple-A rating.

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ECONOMY

France facing key bond test after downgrade

France is to issue long-term bonds on Thursday in the first test of its market credibility in the wake of Standard & Poor's decision to strip the country of its cherished triple-A rating.

France facing key bond test after downgrade
Finance minister Fran├žois Baroin / screenshot

The sale, an attempt to raise between €7.5 billion and €9.5 billion (between $9.5 billion and $12 billion), will be watched keenly to see whether France will pay higher yields or whether the markets will shrug off the downgrade as they did last year when S&P downgraded the United States.

Finance Minister François Baroin voiced confidence ahead of the issue, saying France remained a no-risk bet for investors.

“An investment is rarely risk free, which is why its often profitable. But a risk-free investment does exist, that’s an investment in the sovereign wealth of our country,” he said on Monday.

“France is a great country with a solid … diversified economy, a skilled workforce, a highly resistant banking system and a high savings level,” Baroin said.

“So we can have confidence,” he said, adding that the S&P downgrade needed to be kept in perspective. “This is one message among others.”

New York-based S&P cut the credit rating of nine debt-laden European countries on Friday, including stripping France of its top-notch AAA rating.

Though long expected, the downgrade highlighted increasing concerns over French public finances.

If President Nicolas Sarkozy’s government finds itself saddled with high yields on Thursday, it will call into question the credibility of his deficit reduction plan and plunge the eurozone into further turmoil.

An unsuccessful auction would also likely to hit Sarkozy’s re-election hopes with only three months to go before a presidential vote.

Facing a tough challenge from Socialist candidate Francois Hollande, Sarkozy is desperate to shore up his economic credentials.

France successfully sold 8.59 billion euros in short-term bonds on Monday, paying a lower rate of interest than at a previous similar auction despite the loss of its triple-A.

But analysts said Thursday’s auction will be the real test.

“The longer-term debt auction on Thursday is much more of a challenge,” said Kathleen Brooks, research director at trading site Forex.com.

“Last week we saw good demand for short-term Italian debt, but a lukewarm reception to longer-dated securities issued by Rome. If that happens at the French auction on Thursday then we could see a sharp decline in euro-based assets.”

But she added: “There isn’t much of a relationship between a sovereign rating downgrade and a deterioration in credit market conditions. When the US was downgraded in August 2011, 10-year treasury yields fell to their lowest-ever level six weeks later.”

In its last long-term bond issue on January 5th, France raised just shy of €8 billion. Analysts described demand in that auction as “solid” but France was forced to pay slightly higher interest rates.

The rate on France’s benchmark 10-year bond rose to 3.29 percent in that auction, up from 3.18 percent during the last long-term bond issue on December 1st.

Last month, France said it will need to raise €178 billion in medium- and long-term bonds in 2012, slightly less than last year, as the state will have to meet a budget deficit of €78.7 billion and repay €97.9 billion in debt.

Struggling to get its public finances under control, the French government has imposed two deficit-cutting packages aimed at saving a total of €72 billion since August.

It has said it needs to save €100 billion to balance its budget by 2016 but Sarkozy has vowed no new austerity measures ahead of the election in April.

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ECONOMY

Sweden’s new right-wing govt slashes development aid

Sweden, one of the world's biggest international donors, is planning drastic aid cuts in the coming years, the country's new right-wing government said in its budget bill presented on Tuesday.

Sweden's new right-wing govt slashes development aid

Prime Minister Ulf Kristersson’s government said it planned to reduce the country’s international aid by 7.3 billion kronor ($673 million) in 2023, and by another 2.2 billion kronor in 2024.

That is around a 15-percent reduction from what had been planned by the previous left-wing government and means Sweden will abandon its foreign aid target of 1 percent of gross national income.

International aid for refugees will be capped at a maximum of eight percent of its aid, and will also be reduced.

According to the specialised site Donor Tracker, Sweden was the world’s eighth-biggest international aid donor in terms of absolute value last year, and the third-biggest in proportion to the size of its economy, donating 0.92 percent of its gross national income, behind Luxembourg and Norway.

The new government, which is backed for the first time by the anti-immigration Sweden Democrats, had announced in its government programme last month that it would be cutting foreign aid.

Since 1975, Stockholm has gone further than the UN’s recommendation of donating at least 0.7 percent of its wealth to development aid.

Despite its growth forecast being revised downwards — the economy is expected to shrink by 0.4 percent next year and grow by 2 percent in 2024 — the 2023 budget forecasts a surplus of 0.7 percent of gross domestic product.

It calls for an additional 40 billion kronor in spending, with rising envelopes for crime fighting and the building of new nuclear reactors, as well as a reduction in taxes on petrol and an increase in the defence budget.

The new government is a minority coalition made up of Kristersson’s conservative Moderates, the Christian Democrats and the Liberal party, backed in parliament by their key ally the Sweden Democrats to give them a majority.

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