Moody's Outlook Change Puts Germany's Merkel In a Fix

Germany's credit rating - one of the few in Europe that still carries a top-notch AAA rating - is now in doubt, with Moody's Investors Service changing its outlook on the country to “negative”. While Germany will continue to be considered the safe haven economy on the continent, the threat of a lower rating could make it more difficult politically for German Chancellor Angela Merkel to gather support for further euro zone bailouts. What's a chancellor to do? Merkel faces criticism in the U.S. and globally if she cannot do more to rally politicians within her country bankroll greater economic stability in the euro zone, particularly in Greece and Spain, and perhaps Italy. If she actually succeeds in mustering enough support despite a lack of political will, Merkel will face sovereign debt downgrades, which could raise German borrowing costs and could put an even greater strain on Germany's strong exporting economy. Moody's also dropped its outlook on the Netherlands and Luxembourg to “negative”. All three countries, it said, could risk higher costs related to euro zone bailouts. The debt-rating firm also cited a strong risk of Greece leaving the euro zone – something that could harm bank liquidity, and possibly require even more spending to contain. “In Moody's view, a Greek exit from the monetary union would pose a material threat to the euro,” the ratings service said in its note. “Although Moody's would expect a strong policy response from the euro area in such an event, it would still set off a chain of financial-sector shocks and associated liquidity pressures for sovereigns and banks that policymakers could only contain at a very high cost. “Should they fail to do so, the result would be a gradual unwinding of the currency union, which Moody's continues to believe would be profoundly negative for all euro area members” Yields for Germany's 10-year bunds rose 0.08 basis points to 1.25, bouncing higher from all-time lows set earlier in the month. Spanish 10-year bonds continued to trad above 7.5%, rising to record highs since the euro came into being in 1999.