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Moody's shadow over France

Ratings agency Moody's decision to review France's triple-A credit rating cast new doubt on Tuesday on Europe's hopes of drawing a line under its sovereign debt crisis, five days before a crucial EU summit.

business Updated: Oct 18, 2011 22:06 IST

Ratings agency Moody's decision to review France's triple-A credit rating cast new doubt on Tuesday on Europe's hopes of drawing a line under its sovereign debt crisis, five days before a crucial EU summit.

Moody's said late on Monday it may slap a negative outlook on France's AAA rating in the next three months if the costs for helping bail out banks and other eurozone members stretch its budget too much.

The warning, which sent the risk premium on French government bonds shooting up to a euro lifetime high, came as European Union leaders are preparing measures to protect the region's financial system from a potential Greek debt default.

The plan includes a new rescue plan reducing Greece's debt, strengthening the capital of banks with exposure to troubled eurozone sovereigns and leveraging the eurozone's rescue fund to prevent market contagion to bigger economies.

German leaders on Monday doused market hopes of a miracle cure at Sunday's Brussels summit, saying no one should expect a "definitive solution".

Finance minister Francois Baroin said France's AAA status was not at risk but acknowledged that the 1.8% growth forecast was over-optimistic and would have to be revised down. "We will do everything to avoid being downgraded."

France and Germany form the backbone of the €440-billion EFSF rescue fund. Without France's triple-A rating, the whole edifice of rescue measures for eurozone states would begin to crumble, putting more weight on Germany.