Ratings agency Moody's warned France last night 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 euro zone, which currently enjoys the top credit rating from Moody's and rival ratings agencies.
France's Finance Minister Francois Baroin went on national television to declare that its AAA rating was not in danger because the government would be ahead of schedule on passing deficit reduction measures.
The yield on 10-year French bonds was up slightly to 3.11% this lunchtime. The Moody's report also came as Germany dampened expectations that an upcoming EU summit will finally provide a solution to the euro zone 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," the agency stressed.
It said 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 US. In August, Standard & Poor's dealt the US its first-ever ratings downgrade.