Germany's top credit rating under threat
by Daniel Mason
The top notch credit ratings of three eurozone countries including Germany are under threat as a result of the rising possibility of Greece leaving the currency bloc and the potential that Spain and Italy will require further aid.
Moody's rating agency last night assigned a negative outlook to the AAA credit scores of Germany, the Netherlands and Luxembourg, citing "rising uncertainty regarding the outcome of the euro area debt crisis". The agency said there was an "increased likelihood" of Greece leaving the eurozone and warned of the "broader impact" that would have on other countries such as Spain and Italy.
A Greek exit would "pose a material threat to the euro" and would "set off a chain of financial sector shocks and associated liquidity pressures for sovereigns and banks that policy-makers could only contain at a very high cost", Moody's said in a statement. In the absence of a strong policy response, "the result would be a gradual unwinding of the currency union" – an outcome that would be "profoundly negative" for all member states.
In a separate report published today, the Centre for Economics and Business Research think-tank said there was a "view that the European financial authorities are only waiting until the long-term funding mechanism, the European Stability Mechanism, is ratified in September before cutting Greece out of the eurozone." Officials from the European Commission, European Central Bank and International Monetary Fund arrived in Athens today to assess Greece's progress in meeting the conditions of its bail-outs.
Moody's added that even if Greece survived in the single currency, stronger economies – particularly the likes of Germany, the Netherlands and Luxembourg – would have to provide more financial support to struggling nations. The lower outlooks mean that the three countries' ratings could be downgraded in the next two years. Moody's placed AAA rated France and Austria on negative watch in February.
In response Luxembourg's Prime Minister Jean-Claude Juncker, in his role as president of the Eurogroup of eurozone finance ministers, said: "We take note of the rating decision of Moody's which confirms the very strong rating enjoyed by a number of euro area member states, as supported by the sound fundamentals which these and other euro area countries continue to enjoy. Against this background, we reiterate our strong commitment to ensure the stability of the euro area as a whole."
Germany's finance ministry issued a statement saying the country would "retain its safe haven status and continue to play its role as the anchor in the eurozone responsibly". It added that "Germany continues to find itself in a very solid economic and financial situation". However, flash survey data published this morning showed both the manufacturing and services sectors in Germany and the wider eurozone shrinking this month.
Meanwhile the stable outlook on Finland's AAA rating was maintained by Moody's, partly because of its demand for collateral for its contributions to euro area bail-outs. Its "relative insulation" from the euro area in terms of trade – thanks to a small and domestically orientated banking system – also provided "strong buffers" against the worst of the crisis, the rating agency said. Finland is now the only AAA rated country in the eurozone to have a stable outlook with all three of the major credit rating agencies.
This latest phase in the crisis has been dominated by concerns that Spain – already granted a €100bn bail-out for its ailing banks – may need a full sovereign rescue, as its regional authorities struggle to meet their funding requirements. This morning the yield on 10-year Spanish bonds rose to a new euro-era record high of 7.592 per cent, while the government sold €3.02bn of three- and six-month debt – more than its target, but at higher yields.
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