AAA caution

US credit rating agency Moody's warned France on Monday that a rise in the borrowing rate on French debt bonds and slowing growth posed a threat to its credit outlook, though not at this stage to its actual rating. All three major rating agencies have France on the top, "triple A" status.

The French government has insisted it will do everything necessary to protect its top rating, as the news sent European stocks plunging.

Moody's announced in mid-October that it could place France's AAA rating on negative outlook in three months if the cost of contributing to the bailouts of French banks and other eurozone countries stretched too far.

"Elevated borrowing costs persisting for an extended period would amplify the fiscal challenges the French government faces amid a deteriorating growth outlook, with negative credit implications," said Alexander Kockerbeck, a senior credit officer, in Moody's Weekly Credit Outlook.

European stock markets closed at six-week lows on Monday amid concern over poor growth prospects around the world, notably in the United States.

Soaring costs

Last week, France was paying nearly twice as much as Germany for its long-term funding. On Monday, the yield on its 10-year bonds fell slightly to 3.45 percent, down significantly from last week, but still well above the 1.91 percent Germany pays.

As part of efforts to calm markets and improve France's fiscal health, President Nicolas Sarkozy has vowed to slash the country's budget over the next few years and balance it by 2016.

But Kockerbeck noted that the austerity measures could compromise growth and thus force more austerity, as has already happened twice this year. The economy is now expected to grow only 1 percent in 2012.

French Finance Minister Francois Baroin defended the government's program on Monday, after Moody's report.

"These measures won't have a negative impact on the French economy," he said. He also noted that France continued to finance itself in the market at "very favorable" levels.

But Moody's said slowing growth combined with rising interest rates would make it hard for France to hit its target of cutting fiscal deficit from an estimated 5.7 percent at the end of this year to an EU ceiling of 3 percent by 2013.

"The French social model cannot be financed if the French economy's potential is not preserved. With further weakening GDP growth the political scope for the government to generate further savings in this case would be tested," Moody's said in Monday's note.

Author: Joanna Impey (AFP, AP, Reuters)
Editor: Martin Kuebler