Moody's threatens Germany downgrade as Spanish bonds soar

Jul 24, 2012

Credit rating agency says stable eurozone nations are threatened by developments in Spain and Greece

GERMANY, the Netherlands and Luxembourg received a shot across the bows last night when Moody's put their top-notch AAA credit ratings on negative watch.

The move means that three of the eurozone's most stable economies could see their credit ratings downgraded within 18 months.

Moody's said that all three countries are susceptible to the effects of two eventualities: a Greek exit from the eurozone and the likelihood that the strongest single currency members might be called upon to provide more financial support for countries that have not yet received bailouts, namely Italy and Spain.

News of a potential downgrade to core eurozone countries followed a torrid day for the single currency area. Markets across Europe fell as the cost to Spain of borrowing over ten years soared to a euro-era high of 7.55 per cent, The Times reports. Fears that the Spanish regions could ask Madrid for their own bailout added to the negative market sentiment.

EU officials will today have the opportunity to tackle both of the concerns raised by Moody's.

A meeting in Berlin between German and Spanish finance ministers Wolfgang Schauble and Luis de Guindos is likely to be dominated by the latter's unsustainable borrowing costs, which today climbed yet higher to 7.56 per cent for ten-year bonds.

Spain has reason to be confident it will get the help it needs to avoid a full state bailout. The Financial Times reports that Germany "has been far more sympathetic to Madrid's plight than to Athens or Rome" – and a bailout for Spain would eat up the entire European rescue fund before it has even come online, leaving nothing for the next ‘domino', Italy.

Elsewhere, representatives from the European Central Bank, International Monetary Fund and European Commission will arrive in Athens today to assess whether Greece is making sufficient headway in its austerity programme to allow the country to receive the final €31.5bn of a total €130bn bailout.

Athens is behind in its efforts to cut its budget deficit to below three per cent of GDP by 2014, according to the BBC, and a report over the weekend suggested the IMF was not prepared to advance Greece any further aid.

However, a spokesman dismissed the report, saying:  "The IMF is supporting Greece in overcoming its economic difficulties."

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