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. German Chancellor Angela Merkel said Sunday's meeting would be an important step but warned one summit would not be enough to resolve the crisis, while the EU's trade chief said the currency zone could unravel unless tough action was taken.
Moody's 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 of helping bail out banks and other eurozone 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," the US ratings agency 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 prepared 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 eurozone countries and leveraging the eurozone's rescue fund to prevent market contagion to bigger economies. Merkel told a news conference in Berlin that "further steps" would be needed after Sunday's summit to overcome the sovereign debt crisis.
"These sovereign debts have been built up over decades and therefore one cannot resolve them with one summit but it will take difficult, long-term work. Nonetheless, I do think we will also be able to take relevant, important decisions," she said. The summit is likely to agree to leverage the bailout fund by allowing it to underwrite a portion of newly issued eurozone 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 (EFSF) could stretch three to five times further. "This idea is the main contender," one official said.
Economy Minister Francois Baroin insisted that France's AAA status was not at risk but acknowledged that the 1.75 percent growth forecast on which the government has based its 2012 budget was over-optimistic and would have to be revised down. "The triple-A is not in danger because we will be even ahead of schedule on passing deficit reduction measures," Baroin said on France 2 television.
France and Germany, the two strongest economies among the 17 euro zone members, form the backbone of the EFSF rescue fund and are drafting a crisis-fighting strategy for Sunday's summit. Without France's triple-A rating, the whole edifice of rescue measures for troubled peripheral eurozone states would begin to crumble, putting more weight on Germany, where there is a strong public backlash against bailouts.
German leaders on Monday doused market hopes of a miracle cure at Sunday's Brussels summit, saying no one should expect a "definitive solution". Speaking in Berlin, European Trade Commissioner Karel De Gucht blamed political dithering and failure to enforce eurozone rules for the problems, urging governments to act as one. "If Europe's political class is unable to take unpopular decisions on deficits, haircuts, the size of the European Financial Stability Facility and bank recapitalisation, the monetary union may well unravel with truly incalculable economic and political costs," he said.
In Greece, unions representing around half of Greece's 4 million-strong workforce have called a 48 hour general strike for Wednesday and Thursday in protest at a sweeping package of austerity measures due to be passed in parliament this week. Meanwhile Portugal, which has also received an EU/IMF bailout, announced a draconian 2012 budget that risks a severe recession. The European Commission called it "courageous". Greece's overall debt is forecast to climb to 357 billion euros ($491.4 billion) this year, or 162 percent of annual economic output - a level economists agree is unsustainable.