France’s AAA rating ‘could be a stretch’

France has added a new note of caution to the European debt crisis and admitted that it could struggle to keep its top-notch credit rating.

François Baroin, the French Budget Minister, told local television stations that holding on to the country’s AAA rating would be a “stretch”.

The rating does not look to be in immediate danger of a downgrade, but the comments came only two days after Fitch downgraded Spain’s credit rating amid concerns about its economic growth.

European and Asian investors will get their first chance to react to the downgrade, announced after the close of European trade on Friday, when markets reopen today.

Baroin toned down his comments later and said that the Government was committed to the “demanding” target of maintaining France’s top credit rating.

A ratings cut pushes up the interest that a country must pay on its debts and thus has a knock-on effect on its economic growth. France expects its budget deficit to grow to 8 per cent of GDP this year and it intends to reduce that to 3 per cent within three years. The Government has frozen public spending and intends to increase the retirement age and reform the pension system to reduce its debt.

Germany, meanwhile, has hinted that it may increase value-added tax on some items to bring down its budget deficit.

The Spanish downgrade is the latest blow to the eurozone, which is struggling to cope with the fallout from the Greek fiscal crisis. The debt crisis has hit stock markets and hammered the euro over the past two months, despite attempts to create a financial safety net for embattled countries.