Moody’s fires warning on France’s AAA status

Credit rating agency Moody’s has warned on the status of France’s AAA-rating after the yield on its bonds spiked last week.

Yields on French 10-year bonds rose to 3.7%, taking the the spread over German bunds to a euro-era record high above 200 basis points.

The move has prompted Moody's to warn on France's AAA-rating, the FT reported.

"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," the US rating agency said in a weekly credit outlook note.

Moody's took into account the government's efforts to control its budget and pointed out that current yields remained moderate in historic terms. It added it would take several years to affect materially the overall cost of France's outstanding debt.

However, it warned that the deteriorating growth outlook in Europe presented "significant downside risks".

"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 (triple A) debt rating," read the note.

Last month Moody's warned that it could cut its outlook on France's rating from stable to negative depending on how the situation progressed over the next three months.

France's high exposure to Greek debt is a particular concern for investors.

Earlier this month, Standard & Poor's accidentally released a message to some of its subscribers that it had downgraded French debt from its AAA rating. It later retracted the statement.

The news will come as a blow to President Nicolas Sarkozy, who has been focussed on preserving France's credit rating. He has twice in the past three months taken emergency budget measures to keep control of the country's debt levels to try to avoid following Italy and Spain further into a debt crisis.