Markets mixed as Moody's downgrade EU rating outlook
Eurozone map - Photo EP
(PARIS) - European stock markets fell Tuesday but the euro was firm and tension on bond markets eased following a Moody's downgrade of the outlook on the EU's long-term AAA credit rating from stable to negative.
Moody's said its move reflected credit risks faced by key European Union budget contributors, including Britain, France and Germany, all of which now have negative outlooks due to the continent's economic crisis.
"It is reasonable to assume that the EU's creditworthiness should move in line with the creditworthiness of its strongest key member states," a Moody's statement said.
Despite the downgrade, the euro traded for $1.2605, compared with $1.2598 late Monday in London trade, owing to expectations that the European Central Bank (ECB) will unveil a new round of sovereign debt purchases on Thursday.
Major European stock markets were lower in midday trading, with London's FTSE 100 index falling 0.73 percent, the Paris CAC 40 down by 0.36 percent and Frankfurt's Dax off by 0.22 percent.
Moody's said the main reasons for holding its highest rating for the bloc at the moment 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.
The agency did not exclude the possibility of a future EU downgrade however, saying 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.
Michael Hewson, CMC Markets analyst called Moody's decision "a book keeping exercise, more than any change in perception about the EU's financial position.
"It brings it into line to reflect the negative outlooks to the main contributors to the EU budget," Hewson noted.
He added however that the downgraded outlook highlights concerns about debt sustainability and growth prospects of the main EU contributors.
In July, Moody's 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.
Greece is trying to renegotiate terms of its second bailout, while Spain is under pressure to request bailout aid after receiving pledges of aid help to recapitalise its broken banking system.
Struggling economies such as Spain, Italy and Portugal are desperate for help to cut their borrowing costs and hope for good news later in the week.
ECB chief Mario Draghi on Monday defended controversial measures to tame the eurozone debt crisis, including central bank purchases of government debt.
Members of the European Parliament said that Draghi, widely expected to announce further details on Thursday 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.
On public debt markets, the interest rate, or yield, on two-year Spanish bonds declined to 3.266 percent on Tuesday from 3.509 percent on Monday, and for Italy it fell to 2.374 percent from 2.633 percent.
Greece paid a lower rate of 4.54 percent to raise 1.137 billion euros ($1.43 billion) in six-month funds meanwhile.
Draghi, who made no public comment, said that buying government securities of up to 3-year maturities on the secondary market did not amount to bailing out spendthrift euro members -- a charge levelled by some German politicians.