Moody’s ratings agency has cast a cloud over Germany that compounded pessimistic feelings about Europe’s ability to manage its sovereign debt woes after Spain’s bond yields broke to new highs. At issue for the ratings agency is the steep tab Germany would have to pay as Europe’s strongest economy if more countries require bailouts.
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Europe’s markets were down sharply across the board on July 23 after it appeared that both Spain and Italy may be the next contenders for a bailout package. Greece’s ability to keep the agreement it made for its bailout also came more heavily into question.
Moody’s shifted its outlook on German debt to negative, falling short of an actual downgrade. Negative outlooks indicate that a bailout for both Spain and Italy
would have devastating effects on the European crisis.
Fitch and Standard and Poors ratings agencies both have deemed Germany’s triple A rating as stable. A downgrade of the strongest hope that European countries for bailout prospects would wield a sharp blow to the region’s economy. It would probably threaten the euro’s ability to survive.
Germany also has significant exposure to the debt of troubled European countries. Spain’s condition is worsening by the day, increasing fears that Spain will not have access to the credit markets for much longer. This would begin the downward cycle that could result in a downgrade of Germany’s debt, which would exacerbate Europe’s already precarious situation.