France Dealt Another Downgrade, Who Is Next?

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Ratings agency Moody's Investors Service stripped France of its prized triple-A credit rating on Tuesday, triggering worries the move could heighten the risk of a downgrade for other top-rated nations, including the United States and the single currency bloc's largest economy Germany.

"The downgrade is extremely significant considering there has been a lot of talk about the U.S. being downgraded as well. The first image that comes to mind is a line of dominos all standing upright, and one of them now tipping," Ben Lichtenstein, president at Tradersaudio.com told CNBC Asia's "Squawk Box" on Tuesday, adding that the spotlight could turn to Germany next.

Moody's (MCO) lowered France's sovereign rating by one notch to Aa1 from Aaa, citing the country's "deteriorating" economic prospects and the consequent risk to government finances. The ratings agency kept its negative outlook on the country.

Standard and Poor's, which downgraded France by one notch in January, has an AA-plus rating and a negative outlook on the country. Fitch Ratings has a triple-A rating for the country, but with a negative outlook.

While France posted a surprise 0.2 percent rise in gross domestic product (GDP) for the third quarter, driven by household consumption and exports, the ratings agency said there are many risks to its growth outlook, pointing to rising unemployment and constraints to consumption as a result of tax increases and a subdued income growth.

The downgrade has called into question the resilience of Europe's strongest or "core" economies, and the case for buying debt issued by highly-rated sovereigns, said experts.

"What was originally a periphery story - that was going on in Greece, Portugal, Spain and Italy - is moving more to the core countries. France was one of those core countries which was in a stronger position," Paul Bloxham, chief economist for Australia and New Zealand at HSBC, said, adding that going forward, there's a possibility the ratings of other "core" countries will get reassessed.

The downgrade, coupled with the sharp deterioration in Europe's economic momentum, highlights the continued fragility of the euro zone, he added.

Clem Chambers, CEO of financial information website ADVFN agrees that France's downgrade has placed other major economies' sovereign ratings at risk.

"You're seeing downgrades as a part of an overall pattern that is to do with sovereign debts that are not reparable. (There are) balance of payments issues that are unsustainable," Chambers said.

"France is the next domino, and the markets will attack France. The domino will continue from there and it will go to America," he said, adding that investors underestimate the "desperate straits" of debtor countries.

Germany in a Better Position

Jacob Kirkegaard, research fellow at Peterson Institute for International Economics, however, notes that on a comparative basis, Germany's in a much healthier fiscal position than its neighbors.

"Germany fundamentally looks a lot stronger than France, even though the countries have the same debt-to-GDP levels," he said, citing the country's current account surplus of around 6 percent of gross domestic product (GDP) - compared to France which has a current account deficit of 2 percent.

(Read more: Can Germany Stay at Top of Euro Zone Ratings Class?)

According to Sean Callow, senior currency strategist at Westpac Bank, France's downgrade is unlikely to have a significant knock-on effect for the ratings of other nations.

"Given that S&P had already downgraded France in January, essentially, Moody's is just aligning it with the S&P rating. For Germany, it would be a whole different story and that's not something we're expecting in the near-term," he said.



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