WRAPUP 1-France warns on credit rating, Germany on taxes

* Govts ready to take unpopular steps to avoid debt crises

* Germany hints at possible tax rise

* Spain’s Socialist government in political crisis

* Unions prepare defences against austerity and reforms

By David Stamp

LONDON, May 30 (BestGrowthStock) – France admitted on Sunday that
keeping its top-notch credit rating would be “a stretch” without
some tough budget decisions, following German hints that Berlin
may resort to raising taxes to help bring down its deficit.

Euro zone trade unions are preparing for possible
confrontations in the coming week if governments impose
austerity measures or labour reforms unilaterally.

But ministers made clear they were ready to take unpopular
steps to prevent the Greek debt crisis spreading to their
economies, although doubts are growing about whether the Spanish
government in particular has enough support to get its way.

Budget Minister Francois Baroin indicated on Sunday that
France should not take for granted its AAA rating, which allows
Paris to borrow relatively cheaply on international markets and
finance its big budget deficit.

“The objective of keeping the AAA rating is an objective
that is a stretch, and it is an objective that, in fact, partly
informs the economic policies we want to have,” Baroin said.

“We must maintain our AAA rating, reduce our debt to avoid
being too dependent on the markets, and we must do this for the
long term,” he told Canal+ TV in an interview. [ID:nLDE64T0BZ]

Baroin later clarified that the target was “a demanding
(objective) which we’re committed to”.

France has forecast its deficit will hit 8 percent of gross
domestic product this year, but aims to bring it down to within
the European Union’s 3 percent limit by 2013.

Talks are under way on pension reform and Paris has frozen
central government spending, barring pensions and interest
payments, between 2011 and 2013. It is also considering a
constitutional amendment to set binding budget deficit limits.


Berlin’s budget problems are less severe but Finance
Minister Wolfgang Schaeuble signalled at the weekend that
Germans may have to stomach tax rises as well as spending cuts.

Chancellor Angela Merkel’s government is considering raising
value-added tax (VAT) to the full rate of 19 percent on certain
items that currently benefit from a lower rate of 7 percent,
coalition sources told Reuters on Friday.

“If you abolish tax breaks, some will say that’s a tax
increase. At the end of the day, it’s about having a sensible
and balanced policy,” Schaeuble told the Bild am Sonntag paper.

“And let’s bear in mind that cuts on social spending hit
those in the country with less money.” [ID:nLDE64S05T]

Germany’s budget deficit is expected to exceed five percent
of GDP in 2010, modest by current EU standards but well above
the bloc’s limit.

While France expressed its determination to hold on to its
top-notch rating, Fitch on Friday became the second agency to
strip Spain of its triple-A, sending markets reeling.

Spain’s Socialist government is battling to prove to nervous
markets that the euro zone’s fourth largest economy will not go
down the same path as Greece. But with political opposition
growing at home, its ability to push through reforms is limited.

Weekend opinion polls put Prime Minister Jose Luis Rodriguez
Zapatero’s government far behind the opposition, and indicated
that many voters believe he will have to call early elections as
support for a 2011 austerity budget will be hard to muster.

“The government faces not only an economic crisis but a
political crisis too, because the way it’s governing is not good
enough,” said Angel Laborda, an economist at Spanish savings
banks consultancy FUNCAS. “I believe that early elections will
be called, sooner or later.” [ID:nLDE64T06E]

A deadline for the government, trade unions and business to
agree on labour reforms, aiming to cut unemployment and make the
Spanish economy more competitive, looms in the coming week.

Already a May 31 deadline has been pushed back a week. If
the talks fail, the government says it will propose its own
changes by June 11, risking a confrontation with the unions.


The unions, traditionally close to the Socialists, have said
they will respond to any imposed reform with a general strike.

Unions across the continent are preparing their defences.
The European Trade Union Confederation will consider its
response to austerity measures in Brussels on June 1 and 2.

But Italy’s largest trade union already aims to force Rome
to modify its austerity budget with a national strike, probably
on June 25. [ID:nLDE64R22Q]

Europe’s debt crisis began in Greece, after Athens revealed
last year that its budget deficit was far higher than first
reported. Investors reacted by dumping Greek government bonds,
fearing Athens would default on its debt repayments.

But Finance Minister George Papaconstantinou promised that
Greece would not restructure its debt. [ID:nLDE64S0DR]

“Debt restructuring would be disastrous for the country’s
credibility. It would lead to its marginalisation from capital
markets, to even more belt-tightening and a very deep
recession,” he told Sunday’s Eleftherotypia newspaper.

Greece has agreed to drastic belt-tightening under a 110
billion euro ($134 billion) bailout organised by the EU and IMF.

Investment Research

(Reporting by Helen Massy-Beresford and Jean-Baptiste Vey in
Paris, Paul Day in Madrid, Dave Graham In Berlin, Francesca
Piscioneri and Gavin Jones in Rome, and George Georgiopoulos in

WRAPUP 1-France warns on credit rating, Germany on taxes