France’s AAA rating at risk: Moody’s

France risks losing its top AAA grade as Europe's debt crisis prompts a wave of downgrades that threatens to engulf the region's highest-rated borrowers, with Belgium also facing a possible cut, analysts and investors said.

Moody's Investors Service said it may lower Spain's rating, citing "substantial funding requirements", and slashed Ireland's rating by five levels on December 17. Standard & Poor's is reviewing its assessments of Ireland, Portugal and Greece. Credit default swaps show it's more expensive to insure Belgian, French and Austrian bonds than lower-rated securities from Chile and the Czech Republic.

"Every sovereign may get penalized in the year ahead," said Toby Nangle, who helps oversee $46 billion as director of asset allocation at Baring Asset Management in London. "It would a big deal if France was to have its AAA rating stripped. I don't think the likelihood of a downgrade is reflected in the market."

European Union leaders agreed last week to amend the bloc's treaties to create a permanent debt-crisis mechanism in 2013 in an effort to stem contagion that started more than a year ago in Greece. Government bond yields climbed across the region even after Greece and Ireland were rescued and a backstop facility worth about $1 trillion was created.

"If problems in the euro zone aren't solved quickly, then the conditions of refinancing will be expensive for these countries and the ratings agencies will do more downgrades," said Ralf Ahrens, who helps manage about $20 bn as head of fixed income at Frankfurt Trust. "We already see these dynamics in the market. I see France as a risk."

French banks are the biggest holders of debt issued by the region's so-called peripheral countries, posing possible "systemic risks," added Markus Ernst, a credit strategist at UniCredit SpA in Munich.

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