French warning to euro summit

France warned on Tuesday that European unity would be at risk if eurozone leaders failed to take bold action to tackle its sovereign debt crisis at a crucial summit this weekend.

In sharp contrast to signals from Angela Merkel, Germany’s chancellor, playing down the chances of a breakthrough, President Nicolas Sarkozy said that “an unprecedented financial crisis will lead us to take important, very important decisions in the coming days”.

Raising the sense of urgency, the French president added: “Allowing the destruction of the euro is to take the risk of the destruction of Europe. Those who destroy Europe and the euro will bear responsiblity for resurgence of conflict and division on our continent.”

As Moody’s, the US rating agency, warned that France could see its credit outlook cut as a result of the growing sovereign debt emergency, Mr Sarkozy alluded to his country’s vulnerability were the eurozone to fall apart. “France on its own cannot cope.”

Prime minister François Fillon echoed the need for a rapid breakthrough on Sunday: “If we don’t succeed, Europe will be at great risk.”

The European Commission also pushed back against Berlin’s warning that a solution to the eurozone crisis might not be reached this weekend, with a spokesman saying non-EU finance ministers at the G20 had made clear last weekend that “we are expected to provide a comprehensive answer as soon as possible”.

The main reasons are straightforward: no eurozone debt solution, poor growth prospects (Moody’s gives up on Spain seeing 2 per cent growth any time soon) and the consequent difficulty in meeting fiscal targets

“No piecemeal approach is possible any more,” said Amadeu Altafaj-Tardio, the commission’s monetary affairs spokesman. “We need a comprehensive plan.”

The high stakes for France were underlined by the warning from Moody’s that it could lower its outlook for the country’s cherished triple A rating to negative from stable due to the impact of “the uncertain financial and economic environment”.

French bond markets sold off sharply with investors saying the rise in French bond yields, which have an inverse relationship with prices, showed contagion had spread to Paris.

Also on Tuesday night Moody’s dowgraded Spain’s sovereign rating to A1. Earlier, Standard & Poor’s cut the ratings of 24 Italian banks and financial institutions on Tuesday, citing weaker economic growth prospects and tighter credit conditions

The extra cost France has to pay over Germany for 10-year debt rose to 112 basis points, the highest level since 1992. The spread has doubled in the past month as investors increasingly worry France may be sucked further into the crisis. French 10-year bond yields saw one of the biggest daily jumps in recent months, rising to 3.13 per cent.

The euro eased against the dollar, while shares in French banks, heavily exposed to eurozone sovereign debt, dropped sharply. Société Générale stocks fell more than 5 per cent, BNP Paribas dropped more than 4 per cent and Crédit Agricole fell more than 3 per cent.

The differing sentiments in Paris and Berlin appeared to mirror continuing splits between the eurozone’s two largest members over the substance of a weekend deal.

Germany continues to push for significant losses for Greek bondholders – “haircuts” of up to 50 per cent – while resisting efforts vastly to increase the firepower of the €440bn eurozone rescue fund.

France in turn has resisted big Greek haircuts, and argued they should only be attempted if the rescue fund is enlarged to fight off runs on European banks and Italian sovereign bonds, which most analysts believe would follow quickly on a large writedown of Greek bonds.

Officials from Ms Merkel’s Christian Democratic Union said she told allied lawmakers on Tuesday afternoon that talks at EU level were advancing only “millimetre by millimetre”. A day earlier, Ms Merkel’s spokesman had warned already that “dreams” that “everything will be solved and everything will be over on Monday” were misplaced.

Additional reporting by Gerrit Wiesmann in Berlin