Investors are losing options to safeguard their funds in the highest investment-grade assets after Moody's decided to strip France of its triple-A rating.

The US rating agency has downgraded France by one notch to 'Aa1' while keeping a negative outlook, which signals that the country is susceptible to future downgrades.

"The first driver underlying Moody's one-notch downgrade of France's sovereign rating is the risk to economic growth, and therefore to the government's finances, posed by the country's persistent structural economic challenges," Moody's said.

"These include the rigidities in labour and services markets, and low levels of innovation, which continue to drive France's gradual but sustained loss of competitiveness and the gradual erosion of its export-oriented industrial base."

The decision was widely expected after recent concerns about the French economy were cited. Nonetheless, analysts fear that this will trigger a new spiral of rising borrowing costs that have already hit the European periphery.

Standard & Poor's had already downgraded France's triple-A rating back in January. Fitch Ratings still has France at triple-A, both with negative outlooks. However, investment funds often require top assets to have at least two top-notch ratings to remain in their portfolios.

Moody's decision may become a concern for other European countries who must also support the financial assistance provided through the Eurozone's rescue mechanisms. The European triple-A club is becoming more 'VIP' than ever, down to Germany, Finland, Holland, and Austria.

French Finance Minister Pierre Moscovici has been quick to react. He told Reuters the downgrade was a motivation for the six-month-old Socialist government to pursue reforms and reassured that French debt remained at record low yields even after the S&P downgrade.

JP

Related share prices