Sovereign debt: One the main global credit ratings agencies downgraded the Grand Duchy subsidiaries of three international banks on Wednesday.

Citing the ongoing euro zone crisis, Moody’s Investors Service lowered the outlook for the Luxembourg units of Germany’s Commerzbank and Norddeutsch Landesbank and Italy’s UniCredit, which were downgraded along with their parent firms.

All told, the agency downgraded more than a dozen German, Austrian and Italian banks in its early morning reports. About one third of Luxembourg banks are affiliates of German financial institutions.

“Today’s rating actions are driven by the increased risk of further shocks emanating from the euro area debt crisis, in combination with the banks’ limited loss-absorption capacity,” Moody’s wrote. The agency said that the value of the banks’ portfolios would likely fall significantly if the euro zone’s economy dipped into recession.

Moody’s added that the banks would have difficulty raising funds to restore their capital buffers--which most European banks still need to do in order to meet increasingly stringent regulatory requirements--particularly if the institutions saw poor earnings in the coming quarters.

In somewhat of a Catch-22, the lowered ratings are likely to drive up the banks’ cost of borrowing in global capital markets.

Long term debt for the Commerzbank group--along with its operations in Ireland and Luxembourg--was downgraded one notch to A3, the seventh highest out of Moody’s 21 levels, which the agency describes as “upper-medium grade.” It was Commerzbank’s second downgrade of the year.

State-backed Norddeutsch Landesbank and its Nord/LB unit in the Grand Duchy were lowered two levels to A3.

Unicredit group and its operations in Austria and Luxembourg were lowered one notch to Baa3, the lowest “investment grade” score.