Moody's downgrades Germany's outlook to negative

New York: Moody’s Investors Service on Monday changed its outlook for top-rated Germany, the Netherlands and Luxembourg to negative from stable, warning that they may have to increase support for indebted euro zone states such as Spain and Italy.

Moody’s also cited an increased chance of Greece leaving the euro zone, which “would set off a chain of financial sector shocks … that policymakers could only contain at a very high cost.”

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The agency affirmed Finland’s ‘Aaa’ rating and stable outlook, but it said all four countries were adversely affected by rising uncertainty about the outcome of the euro area debt crisis and the increasing likelihood that greater support would be needed by other euro area countries, most notably Spain and Italy.

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Moody’s said the burden of that support would fall most heavily on the euro zone’s top-rated states. It said its actions on Germany, the Netherlands and Luxembourg mean it now has negative outlooks on all the countries “whose balance sheets are expected to bear the main financial burden of support.”

The agency put France and Austria on negative outlook in February.

Finland escaped a negative outlook partly because of its small and domestically oriented banking system and its limited trade links with the rest of the euro area, Moody’s said.

Ratings agency Standard & Poor’s has a stable outlook for Germany but negative outlooks for Luxembourg, the Netherlands and Finland. All are rated ‘AAA’.

Fitch gives all four the top rating and stable outlooks.

Reuters