France warns on 2012 growth; Moody's starts probe

October 20, 2011 - 4:06 PM

PARIS (AP) — France's finance minister said Tuesday that 2012 growth may be lower than estimated, a day after a leading agency warned that it may put the country's cherished triple-A rating on notice for a possible downgrade.

Ahead of the 2012 budget debate in parliament, Finance Minister Francois Baroin warned on France-2 television that the growth estimate of 1.5 percent for next year was "probably too high."

He blamed the risk of a global slowdown, which he said could be "very vast" and "severe."

Baroin said the government would "put everything in place to avoid falling into a recession... and to protect our country from a downgrade" of its triple A rating, a day after Moody's said it was assessing the country.

However, Baroin said he wouldn't change the forecast just yet, especially in the run-up to the meeting of eurozone leaders in Brussels this Sunday and the early November meeting of the Group of 20 leaders from the industrial and developing world.

"If we are capable in the next two weeks of .... measures powerful enough to stop speculation so that we can make people understand that we will not let 60 years of European construction collapse ... then I will have no worries, there will be growth in 2012 and 1.5 percent will be achieved," he said.

Being the eurozone's second largest economy, France could well have a big bill to pay for sorting out Europe's debt crisis.

It's in that context that Moody's said it will be studying whether to put France's rating on notice for a possible downgrade over the next three months. It said it will focus in on the government's ability to implement its fiscal and economic reforms as well as any other potential adverse economic or financial market developments.

It said the French government has much less room for maneuver in terms if stretching its balance sheet than it had in 2008.

"France may face a number of challenges in the coming months — for example, the possible need to provide additional support to other European sovereigns or to its own banking system, which could give rise to significant new liabilities for the government's balance sheet," Moody's said.

Moody's warning comes ahead of Sunday's meeting of eurozone leaders in Brussels. For days, markets have been hopeful that they would unveil a comprehensive solution to Europe's debt crisis that would include a big ramp up in the bailout fund, a recapitalization of a large segment of the banking sector and a strategy for Greece.

However, on Monday German officials sought to downplay market expectations and the market mood has turned sour once again. France's CAC-40 index of leading shares was underperforming its main peers in Europe on Tuesday, trading 1.7 percent lower as against the 0.6 percent fall on the German DAX.

Ahead of the meeting on Sunday in Brussels, the markets will be closely monitoring comments from all round Europe.

Jan Kees de Jager, the Netherlands finance minister, said the meeting needs to produce concrete results even though his counterpart in Germany, Wolfgang Schaeuble, said Monday that the weekend summit would not provide a "definitive solution."

De Jager is quoted in Germany's Die Welt newspaper Tuesday as saying that the markets "are awaiting a long-term solution. The overall package must involve a wide-reaching and irreversible agreement over enhanced controls in the eurozone in the future."

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David Rising in Berlin contributed to this story.