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Luxembourg AAA warning

News Business 11.06.2012 Aaron Grunwald
Photo: European Commission archives

Sovereign debt: One the main global credit ratings agencies said the Grand Duchy’s top notch rating could be lowered because of the debt crisis in Greece and Spain.

“Recent developments in Spain and Greece could lead to rating reviews and actions on many of the euro area countries,” Moody’s Investors Service said in a report issued late Friday night.

The agency said that as the risk of a Greek exit from the euro increased, so did the pressure on fellow euro area countries. That could ultimately lead to further downgrades, even for countries with solid finances.

In the report, Moody’s wrote that “Greece’s exit from the euro would lead to substantial losses for investors in Greek securities,” both because of an immediate devaluation of a potential new Greek currency, and because of the “severe” economic contraction that is likely follow.

“It could also pose a threat to the euro’s continued existence,” Moody’s warned. The credit agency said that Cyprus, Ireland, Italy, Portugal and Spain were most at risk from a Greek exit.

At the same time, “should Greece leave the euro, posing a threat to the euro’s continued existence, Moody’s would review all euro area sovereign ratings, including those of the Aaa nations,” the agency said. In addition to Luxembourg, the other euro zone states with the highest possible credit score are Austria, Finland, France, Germany and the Netherlands.

In January, rival credit agency S&P downgraded France from its triple A group, citing similar concerns.

Moody’s downgraded the Grand Duchy subsidiaries of three international banks last week.

A lower credit rating leads to higher costs when countries, banks or companies borrow in global capital markets.

The agency also said that estimates for the cost of recapitalising Spanish banks continued to rise, so it was placing Spain on its watch list for potential downgrades. Moody’s added that Spain’s banking problems are “not likely to be a major source of contagion to other euro area countries, except for Italy.”

sovereign debt Moody’s Greece euro Bank S&P AAA