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Moody's Lowers EU's Rating Outlook

Despite the downgrade in the outlook, Moody's maintained the EU's AAA credit rating.
The Moody's rating agency has lowered its outlook for the European Union's long-term credit rating from "stable" to "negative," saying the move reflects the negative outlook of the bloc's key budget contributors.

Earlier this year, the ratings agency put ratings for Britain, France, Germany, and the Netherlands on a negative outlook, saying these countries were all exposed to the region's debt crisis.

Despite the downgrade in the outlook, Moody's maintained the EU's AAA credit rating, saying its "two key rationales" for assigning the bloc its highest rating remained unchanged: Its "conservative budget management" and "the creditworthiness and support provided by its 27 member states."

Britain, France, Germany, and the Netherlands -- which together account for 45 percent of the EU's budget revenues, according to Moody's -- also maintain an AAA rating.

The agency, however, did not rule out the possibility of a future downgrade, saying a "deterioration in the creditworthiness of EU member states" could prompt such a move.

Moody's said that the 27-nation bloc would regain a stable outlook in its ratings should the rating of the key triple-A contributors return to stable.

'Underlying Problems'

In Brussels, European Commission spokesman Simon O'Connor told journalists that the Commission had no immediate comment on the downgrade.

James Shugg, a senior economist at the Australian bank Westpac, said the downgrade by Moody's reflects what market traders already understand about Europe's debt crisis.

"I think the reasons behind today's move by Moody's, which they have laid out, is well understood and very much in the market already, so I don't think it's an extra pressure," Shugg said. "It's merely a reflection of the underlying problems that are compelling the European Central Bank to more fully participate in a possible solution to the sovereign debt crisis."

Michael Hewson, a financial derivatives dealer for CMC Markets in London, told Reuters that the downgrade was a "book-keeping exercise."

"This move by Moody's is a book-keeping exercise, essentially just to bring it in line with the negative outlooks for France, Germany, Holland, and the U.K." Hewson said. "It makes no sense to have a ratings agency for the EU on a stable outlook when 45 percent of the EU budget are on a negative outlook."

Searching For A Solution

The Moody's report is only the latest reminder of the risks that continue to threaten the eurozone.

Greece is still seeking trying to renegotiate the terms of its second bailout with international creditors. Without the money, Athens will be forced to default on its sovereign debt -- a step that could trigger fresh global financial turmoil.

There are also persistent concerns that Spain may also have to request a sovereign bailout after accepting 100 billion euros' ($126 billion) worth of aid to recapitalize its banks this summer.

Moody's is to review Spain by the end of September and could downgrade Spanish bonds to junk status.

Underscoring the urgency of the crisis, European leaders held a series of meetings Tuesday to plan the way forward.

German Chancellor Angela Merkel met with EU President Herman van Rompuy in Berlin, while French President Francois Hollande met in Rome with Italian Prime Minister Mario Monti.

Greek Prime Minister Antonis Samaras is due to meet in Frankfurt on September 11 with European Central Bank chief Mario Draghi.

The European Central Bank also is expected on September 6 to announce new measures to try bring the debt crisis under control.

Draghi told European lawmakers on September 3 that the bank had a responsibility to intervene when necessary, including by the controversial buying up of government bonds.

With reporting by AFP, dpa, RFE/RL Brussels correspondent Rikard Jozwiak, and BBC
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