Moody’s France Rating in Peril, AAA Status Under Review

Another possible major credit downgrade is in the news, with credit rating agency Moody’s putting France on notice for a potential lowered outlook.

France’s ten-year notes are behind only Greece, Ireland and Belgium in Q4 of 2011, and trader speculation that the European Financial Stability Facility could be used in the event of a default of sovereign debt in order to cover losses has threatened Moody’s France rating, the agency has warned. Late Monday, Moody’s commented on the situation in a report and said:

“The deterioration in debt metrics and the potential for further contingent liabilities to emerge are exerting pressure on the stable outlook of the government’s Aaa debt rating. The French government now has less room for maneuver in terms of stretching its balance sheet than it had in 2008.”

Economist Bob McKee of Independent Strategy Ltd. in London spoke of the effects of Moody’s France rating on that of other European nations:

“France is the key factor here. Offering insurance increases France’s contingent liability and that puts pressure on its rating. If France loses its AAA status, that in turn increases the pressure on Germany.”

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France’s Finance Minister François Baroin said the country “will do everything to avoid being downgraded,” and the New York Times carried some of Baroin’s official comment on the report:

Mr. Baroin said France’s AAA rating was “not in danger” because the government was ahead of schedule in passing a spate of measures to reduce the deficit. However, he acknowledged that economic growth — which ground to a halt in the second quarter — would probably not meet the 1.75 percent target the government had set for 2012.

“It’s probably too high compared to the development of the economic situation,” Mr. Baroin said on French television.

The Times notes that France’s debt rating has been under close watch since the August Standard & Poor’s downgrade of America’s credit.