Moodys warns France over possible AAA rating downgrade

European stocks have tumbled and the euro dropped against the dollar Tuesday after France was given a warning over its AAA rating by Moody's. The rating agency said the country’s financial strength had weakened and the deterioration in government debt meant it was now among the weakest countries with the top rating. 

Reuters/Mike Segar

Finance Minister Francois Baroin said the government would do everything to make sure France was not downgraded.

“We have room to manoeuvre… we will take all the measures so there is no concern,” he told France 2 television. “ He pointed out that there had already been structural reforms such as raising the retirement age and public sector cuts.

But he warned that France may have to lower its growth expectation for 2012 saying the forecast of 1.75 per cent was probably too high and there was a risk growth could be below 1.5 per cent.

If Moody’s changes the French credit rating from stable to negative it would signal a likely downgrade in future which would lift the cost of borrowing for the government.

If this happens, France would follow in the footsteps of the United States which was downgraded by Standard & Poor’s rating agency in August.

But Celine Antonin, an economist with the French Economic Observatory, believes there is no real need for concern.

"Even though France has a problem that's been growing, maybe we should say a few things in its favour,

" she says. "It has a high savings rate and a competitive economy, which are taken into account by rating agencies. So maybe we should take Moody's as a warning, and not as if France has already been downgraded."

Meanwhile, shares on European markets were also hit by weaker-than-expected Chinese growth data which weighed heavily on Asia-Pacific shares.

China announced its economic growth slowed to 9.1 per cent in the third quarter, its lowest level for two years, amid government efforts to tame inflation and turbulence in Europe and the US curbed activity.

London's FTSE 100 index of leading shares dropped 1.31 per cent in morning trade, as investors also reacted to a spike in British inflation.

Frankfurt's DAX 30 shed 1.0 per cent and in Paris the CAC 40 decreased 1.78 percent.