Moody’s casts doubt over France’s triple-A rating

DOUBT cast on France’s triple-A credit rating by Moody’s raised uncertainty over Europe’s hopes of drawing a line under its sovereign debt crisis, five days before a crucial EU summit.

The US ratings agency said it may slap a negative outlook on France’s AAA rating in the next three months if slower growth and the costs for helping bail out banks and other eurozone members stretch its budget too much.

“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,” Moody’s said in its annual report on France.

The warning — which sent the risk premium on French government bonds shooting up to a euro lifetime high — came as EU leaders are preparing measures to protect the region’s financial system from a potential Greek debt default.

That strategy includes new steps to reduce Greece’s debt, strengthening the capital of banks with exposure to troubled eurozone sovereigns and leveraging the eurozone’s rescue fund to prevent market contagion to bigger economies.

The October 23 summit is likely to agree to leverage the bailout fund by allowing it to underwrite a portion of newly issued eurozone debt, eurozone officials said.

With about €300 billion of its €440bn capacity still available, by guaranteeing the first 20-30% of any losses, the European Financial Stability Facility (EFSF) could stretch three to five times further.

“This idea is the main contender,” one official said.

Economy Minister Francois Baroin insisted that France’s AAA status was not at risk but acknowledged that the 1.75% growth forecast on which the government has based its 2012 budget was over-optimistic and would have to be revised down.

He said: “We will do everything to avoid being downgraded.” Asked if next year’s outlook would have to be reduced in light of weak growth prospects, he added: “We will adapt it, that much is clear.”

France and Germany form the backbone of the EFSF rescue fund and are drafting a crisis-fighting strategy for Sunday’s summit. Without France’s triple-A rating, the whole edifice of rescue measures for troubled peripheral eurozone states would begin to crumble, putting more weight on Germany, where there is strong opposition to the bailouts.