France is heading towards a joyless Christmas haunted by the prospect of a downgrade of its credit rating, a move that could plunge the country into recession in an election year.
France's AAA rating is the highest grade that monitoring agencies give in their assessment of creditworthiness. It implies that the country's economy is healthy and lending to it carries no risk. As a result, governments can sign up for new debt, or roll over expiring debt, at the lowest cost.
In normal times, the arcane decisions of Standard and Poor's, Moody's and Fitch would not even flicker on the mental radar screen in France, where there is a deep disdain for "ultra-liberal" capitalism.
But these are not normal times. Europe is gripped by a collective neurosis triggered by the financial crisis of 2008, the domino collapses of indebted economies and the still-unresolved downward spiral of the euro.
Six months ago, President Nicolas Sarkozy began to elevate defence of France's Triple A to the status of a crusade, using it to justify two rounds of spending cuts in a high-living country where austerity is loathed and feared. "I was not elected for France to experience one day the same problems as Greece, Ireland and Portugal," he said.
Sarkozy's lieutenants used the new-found theme of pragmatism to attack the Socialist leader, Francois Hollande, for his tax-and-spend policies. Sarkozy was clearly aware of the gamble, said the satirical daily Le Canard Enchaine. It reports that in late October, he confided to aides: "If France gets downgraded, I'm dead!"
Last week, Sarkozy's fears came a big step closer to becoming reality. The three rating agencies warned eurozone members of a likely downgrade because of worsening economic conditions and doubts over how Europe will fix the flawed management of the euro.
Sarkozy's lieutenants abruptly changed their talk. Bizarrely, they sought to deflect the rating agencies, saying Britain's economy was in a far worse state and a more logical choice for a downgrade, an approach that sparked a spat with London. Sarkozy argued that a downgrade would be no big deal: "It would be an additional difficulty, but not an insurmountable one. What counts above all is the credibility of our economic policy and our resolute strategy of reducing expenditures."
Foreign Minister Alain Juppe said a downgrade "obviously wouldn't be good news, but it wouldn't be a catastrophe either. The United States lost their triple A, but they continue to borrow on good terms."
Not so, say analysts. In France's case, the AAA may see not just one but two notches knocked off, a move that would almost drive up interest rates for 10-year bonds, a benchmark borrowing, by 1.2 to 1.5 percentage points to about 5 per cent.
"This would drive up debt servicing costs by between €2.5-€3 billion ($5.1 billion) a year ... Restoring AAA status takes a long time, sometimes as much as a decade," Philippe Mills, head of Agence France Tresor which places French government bonds on the market, told Les Echos.
A ratings downgrade in recession initiates the risk of a vicious circle, say analysts. It forces up borrowing costs and bites into government revenue. If growth declines, unemployment rises and government income declines.
The timing of any downgrade could be catastrophic for Sarkozy's hopes of a second term. With elections looming in April and May, he would have to initiate a further round of cuts to halt the economy's death spiral. The alternative would be to ignore the problem, thus creating an Italian-style crisis which snowballs.
Either choice is a windfall for extremist parties, said a political insider close to Sarkozy's UMP conservative party. "Loss of Triple A raises, for Sarkozy, the question of responsibility, and, for Hollande, the question of credibility. It would strengthen the image of the mainstream parties as being impotent."