With France’s credit rating slipping away, what’s next for investors?

This week, leaders from the 27 European Union countries will hash out the bloc's seven-year budget process. According to the most recent press reports, talks between European officials were on the verge of collapse due to divisions over whether the EU should collectively cut spending or promote pro-growth policies that, while potentially helpful, would certainly make the bloc's estimated $1.1 trillion budget even more difficult to manage.

Then, last night after the markets closed, an alarming bit of news was published: Moody's, one of the finance world's biggest credit issuers, announced that France's credit rating would fall to Aa1 from AAA. While this one-notch tumble may seem like simply collateral damage from the ongoing continental debt crisis, the shift has big implications for Europe, its ability to cope with its own failing finances and the international financial system as a whole.

According to FXStreet, a news source that covers currency markets, the two European bailout funds – the European Stability Mechanism (ESM) and European Financial Stability Fund (EFSF) may lose some of their borrowing authority following the move.

France's previously sterling credit, which enabled it to take on a nearly 22 percent share in the latter group, is part of the scheme that allows the ESM and EFSF to borrow money so cheaply. Were Standard and Poor's and Fitch to follow their competitors and issue downgrades, France might find itself quickly locked out of capital markets with no bailout fund to save it, the source suggested.

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