Ratings agency raises alarm on core EU economy

22.11.11 @ 09:28

  1. By Philip Ebels

BRUSSELS - In a sign that the eurozone's ongoing debt crisis could infect its second biggest economy, US credit agency Moody's has indicated it might lower France’s triple-A rating.

  • Dark clouds may be gathering over Paris (Photo: Bas Lammers)

"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," it said on Monday (21 November) in a weekly update.

The interest rate on French government bonds has stayed relatively low this year, but went up over the course of last month amid turmoil in Greece and Italy.

At 3.7 percent last week, up from an average of 2.78 percent this year, it is still nowhere near the level at which other eurozone countries have been forced to seek a bail-out. But the difference compared to German bonds, deemed safest by investors, did breach 200 basis points last week, a record since the introduction of the euro.

The French tteasury was quick to downplay the recent hike in borrowing costs. "France's average financing rate for medium- and long-term debt remains low," it said in a statement.

Francois Baroin, French finance minister, added that the current interest rates in by France "correspond to financing conditions which are very favourable."

France announced a fresh round of austerity measures earlier this month in a bid to stem the contagion and has regularly made statements to reassure markets of the soundness of its economic plans. Baroin repeated on Monday "one more time, the untouchable objective of reducing the public deficits."

France is one of six eurozone countries – aside from Austria, Finland, Germany, Luxembourg, the Netherlands – with a top-level credit rating.

But it has come onto market radars due to slow economic growth and its banks' heavy exposure to Greece.

But ratings agencies' credibility was put under the spotlight earlier in November when Standard & Poor's mistakenly sent out a newsletter suggesting it had lowered France's credit rating.

Downgrading France's credit rating would have a series of knock-on effects. It is one of the biggest contributors to the eurzone's bail-out fund, the European Financial Stability Fund, so downgrading France would imply a downgrading of the fund.

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