Embattled Europe hit by credit rating warning

(PARIS) - Moody's warned Monday that every member of the European Union could have its credit rating downgraded without firm action to stem the eurozone crisis as the IMF denied it was in talks to bail out Italy.

Ahead of a new OECD growth forecast likely to deepen the gloom within the eurozone, Moody's said there was a real danger of "multiple defaults" by debt-ridden countries and raised the spectre of the single currency's break-up.

A weekend report in Italy's La Stampa newspaper had said the International Monetary Fund was readying a bail-out package worth up to 600 billion euros ($800 billion), giving new Prime Minister Mario Monti a window of 12 to 18 months to implement urgent budget cuts and growth-boosting reforms.

That report led to an upturn on the European markets, with Italian, German and French stocks gaining more than three percent in initial trading.

Shares were also up in Asia's main markets, with Tokyo rising 1.56 percent while Seoul closed 2.19 percent higher.

In a one-sentence statement, the IMF denied it was holding talks.

"There are no discussions with the Italian authorities on a programme for IMF financing," said the Washington-based organisation.

But analysts said the markets were unconvinced by the IMF denial and that sentiment was also given a lift by a separate report that German Chancellor Angela Merkel and French President Nicolas Sarkozy are considering a new stability treaty that would be limited to only a few countries in the eurozone.

"The rally from a fundamental point of view is being assisted by rumours that the IMF are concocting some sort of elaborate bailout plan for Italy," said Simon Denham, head of Capital Spreads trading group in London.

Greece, Portugal and Ireland have all received bailouts in the last 12 months but a bailout of Italy, the eurozone's third largest economy, would be on a totally different scale.

Italy's 1.9-trillion euro ($2.5-trillion) public debt and low growth rate have spooked the markets in recent weeks.

La Stampa said the IMF would guarantee rates of 4.0 percent or 5.0 percent on the loan -- far better than the borrowing costs on commercial markets, where the rate on two-year and five-year government bonds has gone above 7.0 percent.

Italy needs to refinance about 400 billion euros in debt next year.

The size of the loan would make it difficult for the IMF to use its current resources so different options are being explored, including possible joint action with the European Central Bank in which the IMF would be guarantor.

Countries such as Italy, Greece, Ireland and Portugal have all suffered rating downgrades that accelerated unsustainable rises in their borrowing costs over the past two years.

Now the US-based Moody's, one of the world's big three ratings agencies, says the crisis threatens the status of all 27 European Union members.

"The continued rapid escalation of the euro area sovereign and banking credit crisis is threatening the credit standing of all European sovereigns," it said.

"In the absence of policy measures that stabilise market conditions over the short term, or those conditions stabilising for any other reason, credit risk will continue to rise."

Political uncertainties in Greece and Italy and the worsening of the economic outlook across the euro area had given rise to "the likelihood of even more negative scenarios," it added.

"The probability of multiple defaults ... by euro area countries is no longer negligible."

The agency also cautioned that a series of defaults would also "significantly increase" the likelihood of one or more members not simply defaulting, but leaving the eurozone.

"Moody's believes that any multiple-exit scenario -- in other words, a fragmentation of the euro -- would have negative repercussions for the credit standing of all euro area and EU sovereigns," the agency added.

Germany meanwhile denied on Monday a report it was considering "elite bonds" to pool the debt only of eurozone countries such as itself with a top AAA credit rating.

"There is no plan for 'Triple A bonds' or 'elite bonds' as stated in the article," a finance ministry spokesman after a report in the daily Die Welt.

"We are working intensively on a stability union," the spokesman added, referring to Berlin's drive for EU member countries to sign on to tougher fiscal discipline.

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