The U.S. debt crisis, Greek default and Italian/Spanish woes have, for the most part, allowed France to fly under the radar for some time. Only when investors took notice that the cost of insuring against a French default was rising did it finally click that France could be in more trouble than most countries being scrutinized. As it stands today, France is the fourth largest debtor in the world and that is rapidly escalating ($1.7 trillion and counting). Last year, France ran a deficit of 7% of GDP. Debt / GDP will total around 90% this year, and is expected to hit 95% by 2012. That’s around the same levels that earned the U.S. a downgrade. To compound its increasing debt load, France enjoys a government similar to the U.S. - there are separate elections for the President and the legislature which creates an environment of intransigence and dysfunction (ring a bell?). Additionally, President Sarkozy is extremely unpopular (he scores in the mid 20’s in polls) which is making it difficult to enact needed reforms. On top of this, any bailout of Spain/Italy will mostly be paid for by France and Germany. Germany, at the moment, can afford this. France, on the other hand, can’t. Once you add Spanish and Italian debt to its balance sheet, France looks in terrible shape.
Many are speculating that a potential downgrade to France’s credit rating is on the horizon. Some analysts believe it is just a matter of time before France gets notched by the S&P. To be sure, this will be a huge psychological blow to the already fragile markets. But it’s effects will be more than just psychological. French debt is far more widely held than other countries - 38% of French debt is held internationally (compare this to Italy at 24%, U.S. at 21%, and Japan at 2%). Thus, any French downgrade will have significant impact on the global financial markets. France’s hope to avoid a downgrade will likely depend on its ability to implement planned spending cuts and budget measures to bolster its fiscal standing. Anything below spectacular is not likely to end well.