Paris: The interest rate France pays to borrow money rose again on Monday and along with it fears that the country will lose its cherished AAA credit rating.
Theoretically at least, that rating is the highest a nation can have, allows France to borrow money from the markets cheaply.
But France pays more than nearly every country that has a Triple A rating from all three of the major ratings agencies, except Australia, whose economy is less than half the size, and tiny Austria, which pays about the same rate.
On Monday, the yield on France's 10-year bond - the usual yardstick for a country's borrowing costs - rose 0.05 percentage points to 3.42 per cent. That's nearly twice Germany's and significantly more than the roughly 2 per cent paid on 10-year US Treasury notes.
Some say with yields that high, France retains the AAA rating in name only, since the country has already lost the benefit of the rating, namely low borrowing costs.
No one is actually expecting France to default, but its higher yields reflect investor concern about the country's fundamentals: its overall debt load and the annual budget deficits it runs. And, since the credit ratings of France and Germany underpin the eurozone stability fund set up to tackle Europe's debt crisis, a change in the French rating could be seismic, affecting the entire European bailout plan.
Not to mention that a lower credit rating could mean that President Nicolas Sarkozy gets tossed out of office in next spring's presidential election.
"Let's not delude ourselves: In the markets, French debt is already not AAA," Jacques Attali, an economist and adviser to Sarkozy, told the La Tribune newspaper recently.
The government roundly denounced that comment, and Christian Noyer, the governor of the Banque de France, told the Le Figaro newspaper it was preposterous to think that France wouldn't repay its debts. That, in effect, is what a rating measures: It's the agency's assessment of how good a bet a country or a company is for investors.
Still, France hasn't balanced a budget in three decades, and its deficit ran 7.1 percent of its GDP last year - more than twice the legal limit of 3 percent in the 17-nation eurozone. It also is paying a significant amount to help bail out other troubled eurozone members such as Greece, Portugal and Ireland.
The importance of France's debt rating stretches way beyond the country's borders, since Europe's bailout fund derives its own Triple A rating from the ratings of Germany and France. In the wake of a French downgrade, the bailout fund would most likely need more money to keep its rating - and in this era of austerity and discontent with the euro system, most other euro countries will likely refuse.
A French downgrade, in other words, would rock the eurozone - a fact that underscores just how fragile the continent's bailout system really is.
At home, the credit rating also has psychological and political importance. Sarkozy is already suffering from very low poll numbers, and he and his conservative party both know that losing the rating could seal their fate in the two-round election next April and May.
Sarkozy has not yet said he's running, but it's widely assumed he'll be the UMP party's candidate.
Sarkozy has staked his credibility on meeting a series of deficit-reduction targets and balancing France's budget by 2016. In order to stay on track, his government has been forced twice this year to introduce a raft of extra cuts.
And many say those savings are still not enough, with growth so slow - France recently lowered next year's growth forecast to 1 percent.
"The question is not if France will be downgraded, the question is to know when France will be downgraded," said Marc Touati, an analyst with Assya Compagnie Financiere.
France had a preview of what the loss of the AAA rating might look like last week when a mistaken alert by Standard & Poor's told some clients on Thursday that France had been downgraded. The agency corrected the note an hour and a half later, calling it a technical error and confirming that France's rating remained at AAA and its outlook was stable.
In the interim, however, already rising bond yields jumped and on Monday they closed 0.26 percentage points higher than where they started Thursday.
The speculation about France's rating is not just talk: Moody's said last month it is reviewing the country's outlook - the part of the rating that indicates where the agency thinks the country is going. For now, that outlook is stable, but that could change. If it does, that could also send borrowing costs up, even if the rating itself stays at AAA.
Some analysts mused that S&P's mistake indicated the company was indeed reviewing France's rating.
It's hard to say how much an AAA-rating is worth. Touati said France could easily take on a one-notch loss but that further downgrades could be "catastrophic."
The U.S. suffered a one-notch downgrade this summer - from S&P - and its yields have actually fallen since, but most economists consider the country a special case: As the world's largest economy and the printer of the world's reserve currency, the U.S. and its bonds provide a safe haven for investors in times of turmoil, regardless of their rating.
A study this summer by JPMorgan Chase bond strategists showed just a slight increase in lending rates when countries lose their AAA rating.
Daniel Gros, the director of the Centre for European Policy Studies, predicted that, if nothing else, a downgrade would make France's bond yields more volatile - drawing attention daily to concerns about France's fundamentals. He predicts a change to France's rating in the next 12 months - and says there's probably very little Sarkozy's government can do about it.
"What markets are looking for is not so much action by this government, but much more signs of the necessary social cohesiveness you need" for reforms that balance budgets in the long term, Gros said.
Unfortunately for the French president, social cohesiveness is not something a leader can order up.
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