The French government turned aside concerns expressed today by Moody's, which suggested France cannot sustain its credit rating because of a lingering fears that it will fall victim to the debt crisis affecting other European nations. The Wall Street Journal analyzes the situation.
Moody's had already warned in October that the country's creditworthiness and the stable outlook on its triple-A rating were under pressure from high debts and deficits, as well as the possibility France may have to grant further support to its banks or other euro zone countries.
On Monday, the ratings firm added that a widening of France's borrowing costs would further compromise the government's efforts.The New York Times notes that Moody's statements led to some gloomy moods in world markets.
The idea of France losing its triple-A rating would have implications beyond Paris. It would signal that the euro zone crisis had spread to core members, and that its effects could no longer be contained to peripheral nations like Greece, Portugal and Ireland. Spain and Italy have also seen their borrowing costs rising significantly. The yields on Spanish 10-year bonds rose 0.16 percentage point, to 6.472 percent, on Monday, while the yield on Italian 10-year bonds held steady at 6,624 percent. Yields above 6 percent set off alarm bells in markets because of fears that they are unsustainable.
“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,” Moody’s said.
Officials are working hard to bulk up the euro zone’s bailout fund, the European Financial Stability Facility, to around €1 trillion, $1.35 trillion, but that task would be dealt a huge blow were France to lose its top-notch credit rating.
The French government will provide a large guarantee to the fund — €158 billion — and a reduction of its credit rating could sway euro zone leaders to abandon the idea of pumping up the fund to buy troubled countries’ bonds, effectively bringing down their borrowing costs, and switch to a more radical set of proposals.At this point, Germany is the only Euro nation that appears exempt from fears that it can fall into debt despair. Whether these fears for the rest of the Euro community are legitimate or simply a lingering reflection of the global recession remains to be seen.