French credit review threatens euro zone rescues

Tue Oct 18, 2011 11:08am EDT
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By Paul Taylor and Daniel Flynn

PARIS (Reuters) - Doubt cast on France's triple-A credit rating by Moody's raised uncertainty over Europe's hopes of drawing a line under its sovereign debt crisis, five days before a crucial EU summit.

The U.S. ratings agency said late on Monday it may slap a negative outlook on France's Aaa rating in the next three months if slower growth and the costs for helping bail out banks and other euro zone members stretch its budget too much.

"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 Aaa debt rating," Moody's said in its annual report on France.

The warning, which sent the risk premium on French government bonds shooting up to a euro lifetime high, came as European Union leaders are preparing measures to protect the region's financial system from a potential Greek debt default.

That strategy includes new steps to reduce Greece's debt, strengthening the capital of banks with exposure to troubled euro zone sovereigns and leveraging the euro zone's rescue fund to prevent market contagion to bigger economies.

The October 23 summit is likely to agree to leverage the bailout fund by allowing it to underwrite a portion of newly issued euro zone debt, euro zone officials said.

With about 300 billion euros of its 440 billion-euro capacity still available, by guaranteeing the first 20-30 percent of any losses, the European Financial Stability Facility could stretch three to five times further.

"This idea is the main contender," one official said.   Continued...

<p>France's Finance Minister Francois Baroin arrives to attend a meeting at the Elysee Palace in Paris, October 13, 2011. REUTERS/Gonzalo Fuentes</p>