Moody’s on Monday lowered the EU’s long-term issuer rating outlook from stable to negative, saying the move reflected credit risks of the bloc’s key budget contributors.
“It is reasonable to assume that the EU’s creditworthiness should move in line with the creditworthiness of its strongest key member states,” it said, citing negative outlooks for Britain, France, Germany and the Netherlands.
In spite of Moody’s pronouncement, the euro rose to a two-month high of US$1.2618 in trading in Asia yesterday, compared with US$1.2598 late on Monday in trading in London.
Dealers were keeping faith with the euro amid rising expectations that the European Central Bank (ECB) will tomorrow announce a round of sovereign bond purchases from struggling economies.
ECB President Mario Draghi on Monday defended controversial measures to tame the eurozone debt crisis, including buying up government bonds.
Members of the European Parliament said Draghi, widely expected to announce further details tomorrow of how the ECB will ease the pressure on struggling eurozone states, told them that the central bank had a responsibility to intervene when necessary.
Moody’s maintained the EU’s “AAA” 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 about 45 percent of the EU’s budget revenue, according to Moody’s — also maintain a “AAA” credit rating.
However, the agency did not rule out a future EU downgrade, saying in its statement that a “deterioration in the creditworthiness of EU member states” could prompt such a move.
“It is reasonable to assume the same probability of default by the EU on its debt obligations as the highest-rated key members states’ probability of default,” Moody’s said.
The agency said while there were “structural features in place that enhance the EU’s creditworthiness,” they were “not sufficient to delink the EU’s ratings from the ratings of its strongest key member states.”
“Additionally, a weakening of the commitment of the member states to the EU and changes to the EU’s fiscal framework that led to less conservative budget management would be credit negative,” it said.
Conversely, the bloc could regain a stable outlook for its ratings should the rating of the key “AAA” budget contributors also return to stable, it added.
Moody’s in July lowered the ratings outlook of Germany, Luxembourg and the Netherlands to negative, saying the “level of uncertainty about the outlook for the euro area” was no longer consistent with stable outlooks for the countries.
France and Austria have been under a negative ratings outlook since February, and Britain was assigned the same status in December last year.
Greece is trying to renegotiate terms of its second bailout, while Spain is under pressure to also request bailout aid in coming after accepting help to recapitalize its broken banking system.
Struggling economies such as Spain, Italy and Portugal are desperate for help to push down their borrowing costs and hope they will receive some good news later in the week.