According to ratings firm Moody’s, the financial problems of the eurozone have caught up to Germany, the financial pillar of the region. Moody’s changed its outlook on Germany’s Aaa rating to “negative” as it made comments on the debt of several sovereigns in the regions.
In the context of today’s rating actions, Moody’s has changed the outlook on Germany’s Aaa government bond ratings to negative from stable. The Aaa rating itself remains unchanged.
The key drivers of today’s action on Germany are:
1.) The rising uncertainty regarding the outcome of the euro area debt crisis given the current policy framework, and the increased susceptibility to event risk stemming from the increased likelihood of Greece’s exit from the euro area, including the broader impact that such an event would have on euro area members.
2.) The rising contingent liabilities that the German government will assume as a result of European policymakers’ reactive and gradualist policy response, which comes on top of a marked deterioration in the country’s own debt levels relative to pre-crisis levels.
3.) The vulnerability of the German banking system to the risk of a worsening of the euro area debt crisis. The German banks’ sizable exposures to the most stressed euro area countries, particularly to Italy and Spain, together with their limited loss-absorption capacity and structurally weak earnings, make them vulnerable to a further deepening of the crisis.
In a related rating action, Moody’s has today changed the outlook to negative from stable for the long-term Aaa rating and short-term P-1 rating of FMS Wertmanagement. Like Germany’s Aaa rating, the ratings of this entity remain unchanged.
FMS Wertmanagement is a resolution agency or “bad bank” scheme for 100% state-owned Hypo Real Estate (HRE) Group created under the Financial Market Stabilisation legislation in Germany (“Finanzmarktstabilisierungsfondsgesetz” — FMStFG). The German government has a loss compensation obligation via the government’s Financial Market Stabilisation Fund (SoFFin) who owns FMS Wertmanagement. Moody’s views FMS Wertmanagement’s creditworthiness as being linked to that of the German government because the government remains generally responsible for any losses and any liquidity shortfalls of FMS Wertmanagement.
The Netherlands and Luxembourg also had Aaa ratings outlook revised to negative. Moody’s Finland’s Aaa rating and stable outlook.
Douglas A. McIntyre