MercoPress. South Atlantic News Agency

Subtle warning from Moody’s to Paris on the French banking system

Minister Baroin, every effort to maintain French pristine credit rating

In a carefully worded statement, Moody's Investor Service hinted that the outlook for France's top-tier credit rating could be at risk. The nation still enjoys “very high government financial strength,” said the ratings agency in its annual credit report on France, released late Monday.

But, that strength has been diminished by the global economic and financial crisis to the point where the French government's “debt metrics” are the lowest of any AAA-rated country according to Moody's.

Moody's said France's credit rating “rests on investors' confidence in the government's ability and its willingness to tackle unforeseen challenges.”

That's a problem because investor confidence is in short supply, while unforeseen challenges tend to come in spades. In particular, Moody's points to “the possible need to provide additional support to other European sovereigns or to its own banking system” as potential events that could result in “significant” liabilities for the French government.

“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 a statement.

France and Germany, the two largest European economies, are expected to be on the hook for much of the cost associated with a possible restructuring of Greek government debt.

The French government stands behind €89 billion in loan guarantees by the European Financial Stability Facility, which makes low-cost loans to euro area nations in need.

But French banks are among the most exposed to government bonds issued by Euro area nations that are struggling to repay debt, such as Italy, Spain, Portugal and Ireland.

The concern is that French banks, which are seen as lacking sufficient capital reserves to survive a contagious sovereign debt crisis, may need to be bailed out by the government.

Moody's stressed that its report does not constitute a ratings action, and that the outlook for France remains stable. But the agency said it will monitor the government's progress on its fiscal and economic reforms over the next few months.

French finance minister Francois Baroin told broadcaster France 2 that the government will make “every effort” to maintain its pristine credit rating, according to Le Monde.

Baroin said preserving the nation's rating is crucial. But he added that the government has the “flexibility” to avoid being downgraded, “so there is no concern.”

Baroin called for “sang-froid,” apparently referring to jittery investors. But he acknowledged that implementing planned economic and fiscal reforms will be challenging. “Obviously it's difficult, but indispensable,” he said.