MercoPress. South Atlantic News Agency

France in the Euro-debt firing line: Moody’s warns of negative outlook

French president Nicholas Sarkozy

A rise in interest rates on French government debt and weaker growth prospects could be negative for the outlook on France's credit rating, Moody's warned in a report released Monday, adding to pressure on European debt markets.

Since worries surfaced that France have the weakest economic fundamentals among the Euro six AAA-rated countries, Euro zone's second largest economy has been driven into the firing line.

The rating agency said the deteriorating market climate was a threat to the country's credit outlook, though not at this stage to its actual rating.

“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” Senior Credit Officer Alexander Kockerbeck said in Moody's Weekly Credit Outlook dated Nov. 21.

”As we noted in recent publications, the deterioration in debt metrics and the potential for further liabilities to emerge are exerting pressure on France's creditworthiness and the stable outlook (though not at this stage the level) of the government's Aaa debt rating,“ the Moody's note read.

The yield differential between French and German 10-year government bonds rose above 200 basis points last week, a new Euro-era high.

Moody's said that at that spread level, France pays nearly twice as much as Germany for long-term funding, adding that a 100 basis point increase in yields roughly equates to an additional three billion Euros in yearly funding costs.

”With the government's forecast for real GDP growth of a mere one percent in 2012, a higher interest burden will make achieving targeted fiscal deficit reduction more difficult,” Moody's said.