France should retain its cherished AAA credit rating even if it shoulders billions of euros in liabilities for troubled Franco-Belgian bank Dexia and injects capital into other banks, analysts say, although the fine print of any move will be key.

Limited loan guarantees, that would count as off-balance sheet items for public finances, and one-off investments in bank stock that should increase in value over time, would not translate into risks for sovereign debt, they say.

However, the rescue of Dexia, and the possibility of plugging funds into other banks, will constrain what little wiggle room is left in state coffers weeks after the government painstakingly marked out 12 billion euros (10 billion pounds) in savings aimed at safeguarding its triple-A badge.

Whether the aid for Dexia is limited to a credit guarantee or runs to an outright cash injection, it should have no effect on France's credit rating, said French economist Jacques Delpla, a veteran consultant and past government advisor.

Future recapitalisations of other troubled French banks, via low-priced equity stakes that could make the state a profit over time, should even be seen as rating-positive, he said.

Rating agencies judge the sustainability of a country's debt. This would be a one-off investment that could yield big profits, so even if France spends a huge amount recapitalising the entire bank system it should not affect its rating.

Forced into action by a nosedive in Dexia shares, France and Belgium have pledged to guarantee its loans and may also have to inject capital. Belgium wants the bill to be split equally.

While details of the guarantees and a likely break-up of the bank will not be unveiled until after a weekend board meeting, France could end up backing tens of billions of euros in debt.

Dexia had assets of more than 500 billion euros at end-June supported by equity of just 6.9 billion euros, which could be quickly eaten up if it suffers heavy losses on its exposures to the sovereign debt of Greece, Italy, Portugal and Spain.

The bank's main problem comes from its reliance on short-term funding from money markets to support tens of billions of euros in mainly long-term loans with maturities that run to several decades.


Under the rescue taking form, France is leaning towards breaking off Dexia's French municipal funding arm and combining it with state bank Caisse des Depots and Banque Postale, the banking arm of France's post office.

The 'bad bank' would hold some 95 billion euros of bonds the group planned to sell, including sovereign debt of peripheral euro states, 7 billion euros of assets backed by U.S. mortgages, open credit lines and Dexia's public lending arms in Italy and Spain.

One analyst, speaking anonymously, said any losses borne by the bad bank might not be booked for years and may not be that big, posing little immediate risk to France's rating.

The Dexia rescue, and pressure to recapitalise other banks, comes at a stressful time, however, with France's rating under scrutiny as faltering growth threatens deficit-cutting targets.

France already has the highest debt and deficit levels of the euro zone's six AAA-rated countries, piling pressure on centre-right President Nicolas Sarkozy to rein in spending just as he faces a tough re-election battle in April, with voters already fed up with economic gloom.

As the No. 2 guarantor of the EFSF after Germany, France's rating is also crucial for safeguarding the euro zone's support mechanism for Greece, Portugal and Ireland (Xetra: A0Q8L3 - news) .

France's nervousness over its rating has been cited by diplomatic and German sources as the reason for a split with Germany over whether the euro zone's EFSF rescue fund should be used to aid banks, rather than national government coffers.

A French finance ministry source denied on Friday there was any disagreement with Berlin as Sarkozy heads for talks on Sunday with Chancellor Angela Merkel over how to strengthen banks and temper fears of a Greek default.


Steep slides in the share prices of France's top banks, BNP Paribas , Societe Generale and Credit Agricole, have increased pressure onto Sarkozy to step in and help them, with opposition Socialists adding fuel to the fire by turning the issue into a pre-election debate topic.

With France's debt servicing costs almost equivalent to its total income tax receipts, Sarkozy is loath to take any risk of a downgrade which would inflate that bill and ensure he is remembered as the man who let France drop out of the triple-A club.

In the event there are defaults by Italy and Spain and more French banks need help, it could have an effect on France's rating, which is already in a precarious situation, said Jennifer McKeown, at Capital Economics in London.

In a 2008 rescue of Dexia, France provided 36.5 percent of guarantees, Belgium 60.5 percent and Luxembourg the rest. This time, with Dexia plagued by liquidity problems and high Greek exposure, Belgium wants an equitable split of the burden.

French Finance Minister Francois Baroin played down the risks from a Dexia rescue this week, telling RTL (Berlin: R8L.BE - news) radio: It won't increase the state's debt because, according to Eurostat, the European statistics agency, all guarantees for banking institutions are not brought into the public debt.

The government recently marked out 12 billion euros in savings for the rest of 2011 and 2012, mainly from axing tax exemptions.

But its rating outlook took another blow when the ruling conservatives lost control of the Senate for the first time in half a century, burying Sarkozy's hopes of winning support to insert a budget-balancing fiscal rule in the constitution.

This is a delicate situation for France ... but the risk would very much depend on what the actual measures look like, said David Schnautz at Commerzbank in London.

Providing only government guarantees and loading up the balance sheet with liabilities, so you stretch your credit but don't necessarily get rewarded, could be looked at with a more sceptical eye by rating agencies than the outright buying of equity shares that you can later sell, he said.

Fitch Ratings France analyst Maria Malas-Mroueh said this week that propping up banks could cut both ways. Clearly an increase in contingent liabilities is not good, but efforts to support the banking system can be positive, she told Reuters.