News / Europe

Germany's Credit Warning Underscores Eurozone Problems

A trader makes a phone call at his desk at the Frankfurt stock exchange, July 24, 2012.
A trader makes a phone call at his desk at the Frankfurt stock exchange, July 24, 2012.
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Lisa Bryant
PARIS — Stock markets and the euro currency dipped Tuesday after the international financial-rating agency Moody's lowered its credit outlook for Europe's strongest economy, Germany.  New jitters are also surfacing over two shakier European economies, Spain and Greece.

By lowering Germany's credit outlook from stable to negative - along with those of two other top-rated countries, Luxembourg and The Netherlands - Moody's is signaling that the eurozone's crisis is affecting even its strongest economies.

The move is the first step to a possible downgrade of Germany's sterling AAA credit rating.  Europe's second-largest economy, France, lost its AAA rating earlier this year.  So did Austria.

Explaining its warning, Moody's said Germany was vulnerable to a possible Greek exit from the eurozone and the need to increase financial support to other ailing countries like Spain and Italy.  

Analyst Benedicta Marzinotto, of Brussels-based think-tank Bruegel, says it also reflects larger fears.

"I think the decision to reduce the rating on Germany is a sign that the rating agencies are considering the possibility of a eurozone breakup which would have consequences also for Germany," Marzinotto said.

Another analyst, Stewart Fleming of London-based Chatham House, said he was surprised at Moody's move.

"The German economy is fundamentally very, very strong," he said.  "Far stronger than the United States economy, the British economy, the Japanese economy.  So I certainly do not see this as an indication that the crisis is about to spread to Germany.  It is not."

It appears a June European Union summit aimed to ease market fears about the eurozone has had limited impact.  Borrowing costs are soaring for Spain, despite an EU agreement to bail out Spanish banks.

And Greece is having a hard time paying back its debt and enacting its austerity promises.  Creditors are in Athens now to assess its progress.  But with the Greek economy shrinking faster than expected, expectations are again mounting that that the country may exit the eurozone.

Fleming believes a Greek exit would be disastrous.

"Leaving the eurozone in the middle of an economic, financial and political crisis is of no advantage to Greece or its people," he said.  "So efforts will be made to keep Greece in the eurozone, to hold Greece's feet to the fire.  And try and get Greece to take reforms, economic, political and social reforms, which it should have undertaken any time over the past 20 years."

Eurozone leaders are not expected to meet again for several weeks.  But as the summer goes by and their problems mount, analysts say they may need to take action sooner, rather than later.

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