A further intensification of the eurozone crisis could put France’s ‘AAA’ sovereign credit rating at risk, says Fitch Ratings.

In a special report examining the implications of weaker economic growth and the potential cost of the eurozone crisis for the government deficit and debt, and France’s sovereign credit profile, Fitch says that the recent adoption of new fiscal measures by the French government has enhanced the credibility of the government’s consolidation program. However, it notes that additional measures are still likely to be necessary if the 3% of GDP deficit target is to be achieved by 2013.

Fitch is currently projecting the deficit in 2013 to be around 4% of GDP. In Fitch’s baseline scenario, the debt to GDP ratio will peak at 91.7% in 2014, in line with France retaining its ‘AAA’ status. That rating status continues to be underpinned by a high-value added and diverse economy, broad and stable tax base, and its commitment to deficit reduction and stabilizing, and eventually reducing, public debt, Fitch says.

However, the rating agency warns that the increase in government debt “has largely exhausted the fiscal space to absorb further adverse shocks” without undermining the ‘AAA’ status. The principal concern for France is that the intensification of the eurozone crisis will generate contingent liabilities that will be crystallized onto the sovereign balance sheet, it says.

The report suggests that if France’s €158.5 billion guarantee commitment to the European bailout fund to be fully utilized, its gross government debt would surpass 95% of GDP, placing it at the higher end of the range that would be consistent with France retaining its ‘AAA’ status. “This would leave the sovereign balance sheet with little room to absorb further shocks, such as having to fund capital injections into domestic banks, unless there were significant off-setting measures that would quickly reduce public debt,” it says.

Under a stress scenario whereby a further intensification of the eurozone crisis resulted in a much sharper economic downturn in France and across the region, and a material increase in the risk of contingent liabilities being crystallized, France’s ‘AAA’ rating would be at risk, it concludes.