Moody’s revives French AAA rating fears

Ratings agency Moody’s has issued a stark warning to France about the viability of its AAA credit rating as the difference between French and German government bond yields widens.

There will be “negative credit implications” for France if elevated borrowing costs persist for an extended period, the agency warned. This would “amplify the fiscal challenges the French government faces amid a deteriorating growth outlook,” it argued.

Due to increased economic and financial market uncertainty in the Eurozone last week, the difference in yield between French and German 10-year government bonds breached 200 basis points, “a euro-era record”, Moody’s pointed out.

Although this spread narrowed to 185 basis points following France’s successful €6.98bn 2-year and 5-year (BTAN) government bond auction last Thursday, Moody’s remained concerned.

“At this spread the French government would pay nearly twice as much as Germany for long-term funding. A 100 basis point increase in yields roughly equates to an additional €3bn in yearly funding costs.

“With the government’s forecast for real GDP growth of a mere 1% in 2012, a higher interest burden will make achieving targeted fiscal deficit reduction more difficult,” Moody’s concluded.

Credit rating agencies have come under closer scrutiny by the European Commission in recent weeks when Standard & Poor’s accidentally misinformed certain clients that France had lost its AAA status.

The European Commission consequently proposed stricter rules for ratings agencies, such as ratings changes first being reported to the European Securities and Markets Authority (ESMA) who would then be responsible for publishing them.

Yet it is not just the ratings agencies that have doubts about France’s AAA credit rating. Last month Eric Le Coz (pictured), deputy managing director of French group Carmignac, said a rating downgrade was “inevitable” for France due to its untenable debt level which currently stands at 85% of GDP.

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