France defends AAA rating despite Moody's warning

City A.M. Reporter
France has vowed to defend its triple-A credit rating after a warning shot from ratings agency Moody's that caused Paris to admit it will probably miss its growth targets this year.

Moody's raised the prospect of stripping one of the pillars of the Eurozone of its coveted triple-A status, saying it could place France on negative outlook in the next three months if the costs for helping to bail out banks and other Eurozone members overstretched its budget.

Moody's also warned of France's weakening economic growth outlook, which could complicate efforts to cut a budget deficit forecast for 5.7 per cent of gross domestic product (GDP) this year - roughly the same level as bailed-out Portugal.

Finance minister Francois Baroin acknowledged the government's 2012 growth target of 1.75 per cent was too high and would have to be adjusted, without saying by how much or when.

"It is probably too high compared to the development of the economic situation ... We will adapt it, that much is clear," he told France 2 television.

He said, however, that France's triple-A rating - essential to the Eurozone's €440bn (£385bn) EFSF rescue fund, which is largely underwritten by Germany and France - was safe because Paris stood ready to take additional budgetary steps.

"It's not in danger because...we will even be ahead of schedule in passing deficit reduction measures," he said.

President Nicolas Sarkozy announced a €12bn deficit reduction package two months ago, consisting mostly of cutting tax breaks. But with a tough re-election battle looming in April, he has avoided politically unpopular spending cuts.

France is increasingly seen by investors as straddling the divide between the Eurozone's solid core and its fragile periphery.

French banks' exposure to periphery sovereign debt has fuelled fears Paris could be dragged into a costly bank bailout - despite government denials - which would weaken its finances and dash hopes of a quick fix to the debt crisis.

"(Germany) is, if you want, the only honest triple A rated sovereign in the G7," Willem Buiter, Citigroup chief economist and former Bank of England policymaker, told a UK parliamentary committee. "The rest are there but for the grace of God and the ratings agencies."

Moody's announcement, which came two months after Standard & Poor's stripped the United States of its prized triple-A rating, helped push the risk premium of French debt over German bunds to a 16-year high.