Moody's lowers EU bailout fund's outlook to 'negative'

All three are guarantors for the EFSF, with Germany holding the largest share at just over 29 percent.

Zeebiz Bureau

New York: Moody’s Investors Service on Tuesday downgraded the outlook on the provisional (P)Aaa long-term rating on the euro zone’s temporary rescue fund to negative from stable, move followed on from its decision earlier in the week to change the outlooks for Germany, the Netherlands and Luxembourg to negative.

Moody's downgrade is considered as a blow to a fund that was supposed to backstop struggling EU members.

Germany has a large stake in the USD 532 billion rescue fund. The Netherlands and Luxembourg also have stakes in the fund, though they are much smaller. All three are guarantors for the EFSF, with Germany holding the largest share at just over 29 percent.

The mounting uncertainty over the debt crisis and the possibility that those stronger economies will have to provide aid to Spain or Italy prompted the move to lower the three countries’ debt outlook Monday, Moody’s said. The debt crisis has flared anew as fears intensify that Spain, the fourth-largest economy in the euro group, would be next in line for a government bailout.

Moody’s said Tuesday that it is revising its outlook to “negative” from “stable” for its top Aaa rating on some of the European Financial Stability Facility’s long-term debt. That puts investors on notice that the rating could be lowered.

Erosion in the creditworthiness of Germany, the Netherlands or other stronger countries could trigger a rating downgrade for the fund, Moody’s said.

Countries in the euro currency group issue “irrevocable and unconditional” guarantees in proportion to their share in the capital of the European Central Bank, Moody’s noted. Countries’ shares are increased in proportion to make up for the other member countries that are in shaky financial condition – Greece, Ireland and Portugal.

The temporary rescue fund is to be replaced by a permanent, USD 603 billion Euro­pean Stability Mechanism when it’s up and running – which won’t be before September.

European leaders agreed at a summit last month that the ESM will eventually be able to funnel money directly to distressed banks – rather than governments – when an effective European banking supervisor is set up.

With Agency Inputs