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By Vittorio Hernandez
Moody's Investors Service warned France that it may lose its top AAA credit rating because of Paris's support for the bailout fund and the country's weakened finances.
The rating agency also hinted it may change France's stable outlook to negative in the coming months, which is short of a downgrade.
Trader speculation that the European Financial Stability Fund (EFSF) will be used to insure the first part of losses in the event of a sovereign default has caused French 10-year notes to be the third-worst performers in the quarter, behind Greece and Belgium.
With this development, investors seek to be paid 93.2 basis points more to hold French bonds over German notes. It is up from 29 basis points in April.
Analysts explained that France offering insurance to the EFSF hikes the country's contingent liability and places pressure on its rating. Policy makers are considering using the French guarantee to ensure that Italy and Spain could continue to access markets as the debt contagion spreads to other, weaker, eurozone members.
French Finance Minister Francois Baroin said the government will do everything to prevent its credit rating from being downgraded. If France does suffer a rating cut, it would be the second triple A nation to suffer a downgrade after the United States.
Moody's pointed out that the French government has less room to move in terms of stretching its balance sheet compared to 2008 when the global financial crisis occurred.
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World - Bailout Fund Support May Cause France to Lose Top Credit Rating | Global Viewpoint