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European Central Bank Feels Pressure As Moody’s Downgrades EU

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Moody’s Investors Service (NYSE:MCO) downgraded the European Union’s rating from stable to negative today. The downgrade highlights the risk to the region’s main players, including Germany, France, the U.K., and the Netherlands that account for about 45 percent of the group’s budget revenue.

European Central Bank Feels Pressure As Moody's Downgrades EU

As per the statement released in Frankfurt, the ratings company lowered the outlook on European Union’s Aaa long-term bond along with the medium-term note program. The change “reflects the negative outlook on the Aaa ratings of the member states with large contributions to the EU budget,” Moody’s said. “The creditworthiness of these member states is highly correlated, as they are all exposed, albeit to varying degrees, to the euro-area debt crisis.”

The sovereign debt crisis has resulted in the lowering of ratings for many countries in the region. Even Spain, which bagged a top Aaa rating from Moody’s Investors Service (NYSE:MCO) between 2001 and 2010, is now close to being junk at Baa3. The countries which still enjoy higher ratings are the ones with stronger economies, or which fall outside the infected region, like the UK.

The lower ratings are the direct result of “deterioration in the creditworthiness of EU member states,” Moody’s Investors Service (NYSE:MCO) said. “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.”

German Chancellor Angela Merkel said yesterday that she would press for a more active crisis-fighting role at the European Central Bank.  As a plan to lower the cost of borrowings for the nations in financial distress, the European Central Bank President, Mario Draghi, suggested that he plans to buy government bonds with maturities extending to almost three years.

“The outlook for the EU’s ratings could return to stable, if the outlooks on the ratings of the key Aaa countries with contributions to the EU budget also returned to stable,” Moody’s said of the 27-member group.

European leaders have started their preparations for the Draghi’s plan for saving the euro bond market. EU President Herman Van Rompuy is traveling to Berlin for talks with the German Chancellor today, and Italian Prime Minister Mario Monti will meet French President Francois Hollande to discuss the matters.

The main hurdle facing Draghi’s plan is the winning back the support of the German public for market intervention. Germany withdrew its support yesterday for Bundesbank President Jens Weidmann on the reports that he could resign over his opposition to the European Central bank bond purchases.

“Moody’s believes that 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,” according to the statement. “Whereas Moody’s acknowledges that there are structural features in place that enhance the EU’s creditworthiness, they are in Moody’s view, not sufficient to delink the EU’s ratings from the ratings of its strongest key member states.”

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Aman Jain
Personal Finance Writer

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