FRANCE ADMITTED yesterday its growth projection for 2012 was “probably too high” but pledged to take all necessary measures to preserve its triple A sovereign debt rating, following a warning from Moody’s of a possible cut in its outlook to negative from stable.

The extra cost France has to pay over Germany to borrow rose to a 21-year high after the note from Moody’s, the US rating agency, with 10-year yields over Germany jumping to 103 basis points – the highest level since November 1990 – and the yield on its 10-year debt moved to 3.08 per cent.

Shares in French banks, which are heavily exposed to sovereign debt, fell sharply on the news. BNP Paribas, Société Générale and Crédit Agricole closed off between 3.3 and 5 per cent.

Finance minister François Baroin told France 2 television that the centre-right government’s projection of a 1.75 per cent increase in gross domestic product for 2012 was “probably too high”. The growth level is critical to France meeting its target of reducing its budget deficit to 3 per cent of GDP by 2013 and thus controlling its public debt, which is set to exceed 87 per cent of GDP next year.

Moody’s pointed out that French government debt metrics “are now among the weakest of France’s triple A peers”.

Mr Baroin said it was “indisputable” that the government would have to adapt the growth figure, but said its budget projections would not need adjusting if growth was between 1.5 per cent and 1.75 per cent. Consensus private sector projections expect a figure of 1 per cent.

“We will conserve the triple A ,” Mr Baroin said. “It is a necessary condition to protect our social model. We will do everything to avoid a downgrade.”

Gary Jenkins, head of fixed income at Evolution Securities, said: “If the economic data disappoints, then France may well be downgraded by mid-2012, although at the moment Moody’s is looking at the outlook rather than considering a downgrade.”

Moody’s said France’s top-notch triple A rating, with a stable outlook, reflects the economy’s strength, the robustness of its institutions and very high government financial strength.

However, it added that although the French sovereign’s financial strength continues to be very high, it has weakened because the global financial and economic crisis has led to a deterioration in the French government’s debt position.

– (Copyright The Financial Times Limited 2011)