Overnight, Moody’s lowered its outlook for AAA-rated Germany, the Netherlands and Luxembourg to negative from stable, leaving Finland with its AAA stable outlook as the sole exception in euroland. Moody’s pointed to Finland’s “unique credit profile”.
The downgrading of the outlook was justified because of both the increased likelihood of a Greek exit from the euro area and the need for greater financial support for struggling euro countries from the stronger euro countries. These countries’ balance sheets are expected to bear the main financial burden of support. The deterioration in Spain’s and Italy’s macroeconomic and funding environment has increased the risk they will need external support and an exit by Greece might set off a chain of financial sector shocks.
We will see whether the decision of Moody’s encourages investors to look for a safe haven in US Treasuries and Gilts like already happened in June, a move that has been partially reversed in recent weeks. S&P already had a negative outlook for the Netherlands, Finland and Luxembourg, but not for Germany.