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France too? Paris may lose AAA credit rating

PARIS - President Nicolas Sarkozy cut short his vacation and pledged to slash France's huge debts, but rising concerns about a possible cut to the country's credit rating helped send bank shares plunging.

Worries that France would lose its triple A rating sparked Wednesday's selloff, which built momentum on rumors that the banks' financial health was in danger.

Credit Agricole ended 11.8 percent down. Societe Generale said it "categorically denies" all market rumors, but its shares closed 14.7 percent lower. Its market value has now fallen from over 40 billion euros at the beginning of July to 17 billion euros Wednesday afternoon.

In a statement, the bank said it has asked France's AMF stock market regulator to open an investigation into the origin of the rumors, "which have gravely hurt our shareholders."

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The sell-off hit banking stocks across Europe, with leading banks in Britain, Italy and Germany also suffering large falls in their share prices.

After rushing back from the French Riviera, Sarkozy summoned key ministers for an emergency meeting after days of mounting warnings from analysts that the debt rating of the world's fifth-biggest economy is at risk.

France's growth prospects are considerably better than those of Italy and Spain's, but its economic expansion is slowing and it's failed for years to reduce a deficit that stood at 7.1 percent last year. No other eurozone economy with a triple-A rating has a higher debt than France's - around 85 percent of national income.

Although rating agencies reaffirmed France's AAA rating, the downgrade of U.S. debt by ratings agency Standard & Poor's last week fueled worries that France could be next to lose the coveted and rare rating if it contributes to further bailouts of eurozone countries.

French Finance Minister Francois Baroin suggested this week that Europe could boost the size of the eurozone bailout fund, the European Financial Stability Facility, although Germany has been reluctant to do so.

Adding to market worries, French presidential elections scheduled for the spring of 2012 also mean it is unlikely the government will implement further austerity measures at a time when the economy is slowing.

The government is already aiming for a deficit of 5.7 percent of national income this year and 4.6 percent in 2012, goals that analysts increasingly see as unrealistic.

Sarkozy said he's asked Baroin to prepare a list of measures to guarantee the government attains its deficit-reduction targets. Sarkozy will take a decision on which measures to implement at an Aug. 24 meeting with his prime minister, budget minister and Baroin.

"We will take the necessary measures to reach these goals," Baroin said, without elaborating.

Sarkozy reiterated his call for a constitutional change requiring balanced budgets and insisted that "commitments to reducing the deficit are inviolable and will be maintained."

His comments appeared to only have a negligible affect on the spread between German and French bond yields, which has risen to 15-year highs.

"With yields now above those of the Netherlands, Finland and Austria, France seems in danger of slipping out of the core to become more closely associated with the eurozone's periphery," said Jennifer McKeown, senior European economist at Capital Economics.

S&P warned in June that France's rating could be threatened if it fails to carry out planned reforms and reduce the deficit.

And the French central bank said this week that the economy will likely grow only 0.2 percent in the third quarter. The bank's monthly industrial survey showed corporate order books and factory utilization rates falling for the second month in a row in July.

Pressures have also been mounting on Germany, starting to feel the pain of a slowing European and global economy as German companies see waning demand for their exports.

But officials in Berlin made clear Wednesday that Chancellor Angela Merkel is sticking to her plans to stay on holiday and return to the office next week.

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