Germany, the Netherlands and Luxembourg saw their outlooks downgraded to negative by Moody's Investors Service late Monday as debt woes in the eurozone continued to worsen. Spain drew the focus of much of the market's worries, with yields soaring at a Tuesday debt auction.
Reuters reported Tuesday that Moody's took the action against the three countries, citing a rising chance that Greece would be compelled to leave the joint currency bloc. Should such an event come to pass, it said in a statement, it "would set off a chain of financial sector shocks … that policymakers could only contain at a very high cost."
Moody's also pointed to the possibility that the three countries, along with other top-rated eurozone members, would have to kick in more money for possible Spanish and even Italian bailouts to continue to support the euro region, which would have a strong negative effect on their economies.
"Given the greater ability to absorb the costs associated with this support," Moody's said, "this burden will likely fall most heavily on more highly rated member states if the euro area is to be preserved in its current form."
Finland managed to retain not only its AAA rating but also its stable outlook, thanks in part to its insistence on collateral for loans made to bailed-out eurozone countries. Also contributing to Helsinki's strength, said Moody's, were its small, domestically oriented banking system; fiscally conservative budget policies; and limited dependence on trade with other countries in the eurozone.
While Standard & Poor's and Fitch both continue to rate all four countries AAA, the former with negative outlooks for Luxembourg, the Netherlands and Finland and the latter with a stable outlook for all four, Moody's said that it would also be taking another look at France and Austria. Although both countries are rated AAA, Moody's dropped their outlooks to negative in February.
In the report, Moody's said that by the end of Q3 it planned to "review whether their current rating outlooks remain appropriate or whether more extensive rating reviews are warranted."
It added that all the countries "whose balance sheets are expected to bear the main financial burden of support" carry a negative outlook. Sarah Carlson, Moody's senior credit officer, said in the report, "We are in a transitional period, and this transitional period could last for many years, and during this transitional period we do see additional pressure on the strongest nations' balance sheets, which has increased pressure on their credit standing."
Bloomberg reported that Germany was not pleased with Moody's action, with its Finance Ministry dismissing Moody's concerns as "not new" and adding that it remained "in a very sound economic and financial situation," pointing to markets' hunger for German bonds and Berlin's record low costs to borrow. The ministry issued a statement that said in part, "Germany will, through solid economic and financial policy, defend its 'safe haven' status and continue to responsibly maintain its anchor role in the eurozone. Together with its partners, it will do everything to overcome the sovereign debt crisis as rapidly as possible."
