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AAA: could France be next to lose top rating?

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09:46 CEST+02:00

After the US lost its AAA-rating last week, there is mounting speculation over whether France is vulnerable to the same fate.

 

"France is the most fragile of the AAA-rated countries in Europe," a source close to President Sarkozy reportedly told AFP two weeks ago.

Market sentiment on Monday seemed to support that fear. 

Credit default swaps, the cost of insuring French debt, hit their highest levels in history on Monday, jumping from1.45 to 1.6, more than twice the US rate. 

Bloomberg reported that France is the most costly AAA country to protect against default. 

Government debt in France totalled €1.59 trillion at the end of 2010, versus Italy's debt figure of €1.8 trillion. France has had a larger budget deficit than Italy every year since 2006.

 

"There are growing signs [France] may soon lose its top spot," reported the Wall Street Journal on Monday.

John Chambers, chairman of Standard & Poor's sovereign ratings committee, confirmed on Monday that the outlook for France remains "stable." 

"Some of the fiscal indicators today of France are actually slightly worse than the US, particularly if you look at the debt position," he said in a conference call.

On a more positive note he praised the steps France has already taken to improve its long-term fiscal position and cited pension reform as a good example.

"France is not, in my view, a AAA country," Paul Donovan, deputy head of global economics at UBS told Bloomberg. "France can't print its own money, a critical distinction from the US. It is not treated as AAA by the markets."

President Sarkozy has committed to cutting the budget deficit. He wrote to parliamentarians in late July urging them to support a 'golden rule' in the constitution that would require governments to deliver a balanced budget. 

Making the change to the constitution would require a special joint session of parliament and a three-fifths majority, for which the president would need the support of around 40 Socialist members of parliament. Reactions from his opponents after he sent his letter made that look unlikely.

France's AAA rating was last confirmed by S&P on December 23rd. Other ratings agencies, Moody's and Fitch, both gave France the AAA rating in May.

 

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