The Moody's ratings agency warns that France's credit rating could be downgraded in the next three months if the nation's budget is stretched further by bank bailouts to help other debt-heavy eurozone countries. France has vowed to defend its AAA credit rating. A potential downgrade could complicate the European Union's efforts to stabilize the region.
France, the eurozone's second largest economy, is under pressure to find solutions to the region's mounting debt problems. Given the nation's lackluster growth this year and its exposure to Greek debt, the ratings agency Moody's warns that France could be dragged into a costly bank bailout, dashing hopes of finding a quick fix.
Robert Halver at Baader Bank AG says the threat is real. "Because regarding the economy, it's weakening definitely and the most important point is that the French Republic and their policy is not able to find a solution common with Germany, to have a clear solution, a long-lasting solution for the eurozone. And that's why the rating agencies have all the power to downgrade France," Halver said.
The warning comes after Moody's downgraded Spain's sovereign rating by two notches -- and just days ahead of a crucial EU summit Sunday aimed at strengthening Europe's financial stability fund.
Economist James Ashley at RBC Capital Markets expects some progress.
"I think we will see significant steps forward this weekend but I don't think it's the end of the crisis. I don't think we come in on Monday morning and the market thinks this thing is over. But I do think we'll see significant steps both on Greece, EFSF reform, and private sector involvement in terms of future bailouts," Ashley said.
Despite the potential damage to investor confidence, European markets were mostly upbeat Wednesday.
Investment fund manager Nathalie Pelras sees the warning as an urgent call to action. "It's more to push the government to act in the next three months, so it's more like an alert. It's in anticipation and it's maybe a good thing for an agency, because for the first time, they just say: be careful without downgrading the outlook," Pelras said.
Financial markets have experienced wild swings from one day to the next in anticipation of a dramatic plan that will stabilize debt-heavy countries such as Greece, and guarantee the future viability of all 17 countries that use the euro.