MacroScope

Will French numbers add up?

By Mike Peacock
April 23, 2014

French President Francois Hollande’s cabinet meets to adopt a new debt reduction plan.

After outlining 50 billion euros of savings for 2015-2017 to help pay for consumer and business tax cuts, the government is due to sign off on already delayed deficit reductions to bring it, eventually, to three percent of output as demanded by Brussels.

The European Commission has taken a dim view of any further relaxation, having previously granted Paris two years extra leeway. The French government insists it will meet its targets but appears to be trying to deliver one message to Brussels and another to its electorate, with domestic politics likely to hold sway.

French media are reporting the government will raise the official deficit forecast for this year and next to 3.8 percent and 3.0 percent of GDP respectively, which leaves no room for manoeuvre. 

Overnight, there has been some heavily coded criticism from closer to home.

France’s High Council for Public Finances, an audit panel created to offer independent assessment of feasibility of the budget programmes, said the government would raise its growth forecasts to 1.0 percent this year and 1.7 percent in 2015 which it said was realistic for this year but maybe not thereafter. Growth of 2.25 percent is pencilled in for 2016.

The Council flagged several weaknesses and risks which implicitly suggest that the plan for 50 billion euros of spending cuts, already generating opposition within Hollande’s Socialist party and further afield, might not be enough.

With European elections looming, Hollande, the most unpopular French leader of the past 50 years, faces a daunting challenge to avoid alienating voters who punished the Socialists in March town hall elections. The plan that goes to cabinet today is due to be put to a vote in National Assembly lower house of parliament on April 30.

Portugal will hold its first bond auction in three years, offering up to 750 million euros in 10-year bonds – a precursor to exiting its bailout next month. It has already successfully sold bonds via syndication since early 2013 and analysts see the resumption of regular auctions as the final move towards establishing normal market access. High demand for higher-yielding euro zone bonds should mean Lisbon faces no problems with the sale.

Portugal’s EU and IMF creditors started their last bailout evaluation on Tuesday with the big question being whether Lisbon takes a precautionary credit line from its lenders, with strings attached, as an insurance policy after its bailout ends. Ireland chose not to. Portuguese yields on the secondary market fell back towards eight-year lows on Tuesday.

Flash PMI surveys for the euro zone, Germany and France will give the latest snapshot of the currency bloc’s still fragile recovery. Reuters polls suggest the euro zone and German figures will be flat to slightly better and the French will be flat to slightly worse. China’s stock market has taken a hit from its PMI showing factory activity shrank for the fourth month running in April.

UK public finance figures for March mark the closure of the 2013/2014 financial year and are likely to show finance minister George Osborne fell narrowly short of the latest official forecasts for the budget deficit.

The killing of a local politician, who was apparently tortured, near the eastern Ukrainian town of Slaviansk has prompted the country’s acting president, Oleksander Turchinov, to demand a new offensive against pro-Russian rebels – potentially threatening an international accord brokered last week which aimed to calm the situation.

Kiev accuses Moscow of fomenting unrest among ethnic Russians in Ukraine but so far its poorly resourced forces have shown little sign of taking on the gunmen who started occupying towns and public buildings two weeks ago.

U.S. Secretary of State John Kerry told Russian Foreign Minister Sergei Lavrov in a telephone call on Tuesday that Washington would impose further sanctions on Russia if tensions did not de-escalate in eastern Ukraine. Moscow said it could handle anything the West chooses to throw at it.

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