Moody's goes negative on German and Dutch economies

Moody’s, the ratings agency, has downgraded its ‘triple A’ assessment of the German, Dutch and Luxembourg economies from ‘stable’ to ‘negative’, arguing that uncertainty surrounding the euro was “no longer consistent with a stable rating outlook”.

The risk to Germany's financial system in the event of a Greek exit from the euro - and the likelihood of a general worsening of the euro crisis - were among the factors behind the move, said Moody's.

While Germany's 'triple A' rating itself remains unchanged, Moody's downbeat assessment will fuel concerns among exporters to the region that the euro crisis is set to envelop those countries that had so far been deemed beyond the reach of more serious problems emanating from Greece.

Moody’s said in a statement that the risk of an exit by Greece from the euro area had increased “relative to the rating agency's expectations earlier this year. In [our] view, a Greek exit from the monetary union would pose a material threat to the euro.

“Although [we] would expect a strong policy response from the euro area in such an event, it would still set off a chain of financial-sector shocks and associated liquidity pressures for sovereigns and banks that policymakers could only contain at a very high cost.”

And with Spain resisting – for now – putting in a bid for a financial bailout, Moody’s said the “continued deterioration in Spain and Italy's macroeconomic and funding environment has increased the risk that they will require some kind of external support”.

While that support had not been called upon, Moody’s believed that it needed to take into account “the impact that additional financial commitments would have on the assessment of their financial strength, given the material deterioration in these countries’ fiscal metrics since 2007”.

On the positive side, Moody’s said the financial reforms being put into place would eventually strengthen the position of “most or all” of the euro member states, although it might be “many years” until the pressure eased on their respective credit standings.

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