Share prices in Europe fell after rumours emerged that France could be in line to lose its top AAA credit rating, following Standard & Poor’s downgrading the US last week.

Rumours that France’s second largest bank Société Générale was in serious financial trouble resulted in a 15% loss in the bank’s shares on Wednesday, but they have risen again by 8% today.

French president Nicolas Sarkozy reiterated the country's commitment to reducing its budget deficit, and announced measures to address France's fiscal situation would be agreed before the end of August.

In a statement, he said pension reforms adopted in 2010 had “durably strengthened” the long-term sustainability of France's public finances and bolstered its credit.

Commitments to reduce the public deficit were "sacrosanct" and would be kept regardless of developments in the economic situation.

Sarkozy also emphasised the "key challenge" of making the recovery effort comply with a rule incorporated into the constitution to balance public finances, as many of France's partners are doing.

Russell Investments’ Chief investment officer – client investment strategies Erik Ristuben said: “Whereas early-week volatility was based on concerns about the US economy and the mostly psychological impact of the S&P downgrade, Wednesday’s drop is the result of the feared contagion effect of the European sovereign debt crisis. The crisis has moved from country to country – hitting the banking system in Italy, Greece and Spain. It’s also spilling over into the relatively more stable French and German systems given fears about exposure to shaky European debt. Today it was France’s turn in the chute.

“France was singled out given talk that it could potentially be the next in line (following the US) for a downgrade of its AAA credit rating, and because of swirling rumors about individual banks and their solvency. The market zeroed in on the fact that France has a strong trade relationship with Italy, and French banks own a good amount of Italian debt. France’s stock market absorbed the impact of these concerns, causing it to close down five per cent.”

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