French Borrowing Costs May Bring On Credit Downgrade

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France is fighting desperately to retain its AAA credit status and has slashed spending and tightened up on tax revenues in an effort to stabilize its strained public finances. An increase in French government borrowing costs, slowing growth and the euro zone debt crisis threatens the country’s top credit rating, Moody’s ratings agency warned on Monday, adding to market jitters.

Right now, France pays nearly twice as much as Germany for long term funding. “Last week, the difference in yield between French and German 10-year government bonds breached 200 basis points, a euro-era record amid increased economic and financial market uncertainty in the region,” Moody’s Investors Service said. “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,” it said in a website statement.

“With the government’s forecast for real (gross domestic product) growth of a mere 1.0 percent in 2012, a higher interest burden will make achieving targeted fiscal deficit reduction more difficult,” Moody’s said. “The French social model cannot be financed if the French economy’s potential is not preserved,” it said, adding that managing the euro zone debt crisis only makes the government’s task harder.

The problems facing France were highlighted again on Monday as the financial markets faced more turmoil, the reality there would be no support for a right-wing government winning power in Spain, and the reality that efforts to reach a bipartisan deal to tame the massive U.S. deficit were about to fail. It looks as though the U.S. debt problem is about to take center stage for the moment which will in turn compound the European debt crisis.

The contagion is spreading, and it looks as though France will become an unwilling participant in it, as will the rest of the world’s economies. French banks are heavily exposed in the Greek crisis and has 400 billion euros exposed to the Italian debt crisis. Economists believe if Italy fails to get its debt under control, then France will fall also.