Threat of French Downgrade Endangers Eurozone Plan

Loss of triple-A rating could imperil efforts against debt crisis

Moody’s Investors Service said late Tuesday that France’s top-grade credit rating was under pressure from the eurozone crisis. The news could mean trouble for the plan being assembled by European leaders to avert a complete economic meltdown, because without France’s triple-A rating, more pressure could fall on Germany to provide support for the plan. There is strong opposition in Germany to additional bailouts at taxpayer expense.

Reuters reported that Moody’s took the unusual step of warning about France’s rating despite the fact that the country is not on a ratings watch. In its annual report on France, the agency said, "The deterioration in debt metrics and the potential for further contingent liabilities to emerge are exerting pressure on the stable outlook of the government's triple-A debt rating." It warned that Paris might be the recipient of a negative outlook if its budget is under too much stress.

The warning came five days before the European Union meets to consider a plan to resolve the ongoing debt crisis, bolster Greece to avoid default and find a way to leverage the European Financial Stability Facility to sufficient strength to restore investor confidence in the health of Italy and Spain.

The news caused the euro to fall for a second straight day; on Monday German Chancellor Angela Merkel warned that it would not be such a simple matter to resolve the debt crisis on Oct. 23 and the euro reacted badly.

French Economy Minister Francois Baroin conceded that the growth forecast of 1.75%, on which the country's 2012 budget was based, was overoptimistic and would require a downward adjustment. Still, he insisted that the country's rating was not at risk, saying in the report, "The triple-A is not in danger because we will be even ahead of schedule on passing deficit reduction measures. We will do everything to avoid being downgraded."

He added that next year's growth outlook would most likely also need a downward revision, saying, "It is probably too high compared to the development of the economic situation."

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