Moody’s cautions possible credit downgrade for France

The Moody’s ratings agency has warned that the credit rating of France may be downgraded in the next quarter if the country’s budget is pulled further by bank bailouts to protect other debt-heavy eurozone countries. France has vowed to defend its AAA credit rating. A potential downgrade may complicate the European Union’s ability to stabilize the region.

The eurozone’s second largest economy, France, is facing pressure to find solutions to the region’s mounting debt problems. A country’s credit rating is vital as it plays a major role in the interest rates of government bonds. Given France’s limited growth this year and its exposure to Greek debt, the ratings agency Moody’s is saying that the nation could be pulled into an expensive bailout for banks, reducing the hope of finding a quick fix. The warning comes days after Moody’s downgraded a handful of British banks.

Robert Halver at Baader Bank AG said the threat is authentic. “Because regarding the economy, it’s weakening definitely and the most important point is that the French Republic and their policy is not able to find a solution common with Germany, to have a clear solution, a long-lasting solution for the eurozone.  And that’s why the rating agencies have all the power to downgrade France,” Halver said.

The cautionary words come just after Moody’s downgraded Spain’s sovereign rating by two notches, and just days ahead of a crucial EU summit Sunday aimed at improving Europe’s financial stability fund. Also up for discussion is a plan to recapitalize many European banks as insurance in case the crisis worsens, and possibly trying to help the country get back on its feet by forcing banks to take sizable losses on their holdings of Greek debt.

Economist James Ashley at RBC Capital Markets anticipates a degree of progress. “I think we will see significant steps forward this weekend but I don’t think it’s the end of the crisis.  I don’t think we come in on Monday morning and the market thinks this thing is over.  But I do think we’ll see significant steps both on Greece, EFSF reform, and private sector involvement in terms of future bailouts,” he said.

In spite of the potential damage to investor confidence, European markets were generally taking things in stride on Wednesday.

Investment fund manager Nathalie Pelras perceives the notice as a stern call to action. “It’s more to push the government to act in the next three months, so it’s more like an alert.  It’s in anticipation and it’s maybe a good thing for an agency, because for the first time, they just say: be careful without downgrading the outlook,” she said.

Financial markets have seen large ups and downs from day to day in preparation for a drastic plan that will calm debt-ridden nations including Greece, and support the continued viability of all 17 countries that make use of the euro.

France plans to take on up to 9.3 billion euros of new debt on Thursday.

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