Moody's warns France there's pressure on its Triple-A rating

18th October 2011, Comments 0 comments

Ratings agency Moody's warned France Monday that it may place a negative outlook on its cherished Aaa credit rating in the coming months as the government's financial strength "has weakened."

The annual credit report is a shot across the bow for the second largest economy in the eurozone, which currently enjoys the top credit rating from Moody's and rival ratings agencies.

The report also came as Germany dampened expectations that an upcoming EU summit will finally provide a solution to the eurozone debt crisis.

The French government's "financial strength has weakened, as it has for other euro area sovereigns, because the global financial and economic crisis has led to a deterioration in French government debt metrics -- which are now among the weakest of France's Aaa peers," Moody's said.

That deterioration and the potential for further liabilities to emerge "are exerting pressure on the stable outlook of the government's Aaa debt rating," the ratings agency added in its annual report.

The debt agency said the French government "now has less room for manoeuvre in terms if stretching its balance sheet than it had in 2008," when the US sub-prime crisis spread worldwide and brought recession to Europe.

France's "continued commitment to implementing the necessary economic and fiscal reform measures" will be key if it wishes to retain its top credit rating, it added.

"Over the next three months, Moody's will monitor and assess the stable outlook in terms of the government's progress in implementing these measures," Moody's stressed.

The agency stressed that its current "stable" outlook for France reflects the economy's "strength, the robustness of its institutions and very high government financial strength."

These features, it argued "provide ample capacity to absorb shocks -- as demonstrated by the resilience of domestic demand during the global crisis.

However risk factors, including the weak prospects for global growth, "continue to constrain medium-term economic performance."

France may also face "a number of challenges" in the coming months, such as the possible need to provide additional support to struggling European economies or to its own banking system.

The country also currently enjoys the top possible credit rating from the Standard & Poor's and Fitch ratings agency, giving investors the confidence to lend to France at favourable rates.

If Moody's changes the French credit rating from stable to negative following that assessment then that would signal a likely downgrade in future, something the French government is anxious to avoid as it would lift the cost of borrowing.

If that is the case then France will follow in the unwilling footsteps of the United States.

In August, Standard & Poor's dealt the US its first-ever ratings downgrade.

Meanwhile in Duesseldorf, German Finance Minister Wolfgang Schaeuble said that while EU leaders were set to "provide cover for uncertainty in financial markets", a permanent solution was unlikely to arise out of Sunday's summit.

He also warned that markets must rapidly stabilise if Europe is to avoid damage to its real economy.

Under intense pressure from their international partners at a meeting of G20 finance ministers and central bankers in Paris at the weekend, Europeans pledged to deliver at this weekend's summit.

French Finance Minister Francois Baroin said "the results of the October 23 summit will be decisive."

For Greek Prime Minister George Papandreou the eurozone faces its "most critical week" ahead of the summit.

The week ahead "will determine the fate of the eurozone", Papandreou said, warning of prolonged "insecurity" unless definitive decisions are taken.

Greece has been kept waiting for two months for a slice of bankruptcy-saving funds, part of a 110-billion-euro loan from the EU and the International Monetary Fund contracted last year.

© 2011 AFP

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