France’s AAA Rating May Be Under Stress as Debt Rises, ING Says

France’s AAA rating may be at risk as the deepening economic slump erodes tax revenue and forces the country to raise borrowing, according to ING Groep NV.

“I’m not saying France is going to be downgraded, but the level of debt puts them in a spot of danger,” Padhraic Garvey, head of investment-grade debt strategy in London at ING, said in an interview. “Their AAA rating is under stress.”

The French government increased its 2009 budget deficit forecast for the third time in 2 1/2 months on Jan. 20 to the highest in 14 years. Public debt will rise to as high as 70 percent of gross domestic product this year, from 67 percent in 2008, Budget Minister Eric Woerth said.

The extra yield investors demand to hold 10-year French bonds instead of the benchmark German bunds widened to 57 basis points on Jan. 21, the most since the euro’s debut a decade ago. The average yield spread in the past 10 years was 8 basis points.

The 16-nation economy will shrink 1.9 percent this year, the first contraction since the euro’s introduction, the European Commission forecast on Jan. 19, cutting its outlook amid the worst financial crisis since World War II. The commission expects France’s deficit to swell to 5.4 percent of GDP in 2009 as the economy contracts by 1.8 percent, the severest recession in six decades.

Standard & Poor’s cut Spain’s AAA sovereign rating by one step to AA+ on Jan. 19. Greece’s classification was lowered to A- from A five days earlier while Portugal’s rating was reduced to A+ from AA- on Jan. 21.