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Germany faces ratings downgrade as Spain tensions mount

Top rated Germany, Europe’s paymaster, faced the prospect Tuesday of a damaging downgrade as Moody’s warned that problems in Spain and Italy made the euro zone debt crisis even more dangerous.

Cutting Germany’s rating outlook to ‘Negative’ from ‘Stable,’ meaning it could be downgraded, Moody’s said no country was immune from a crisis which has already forced Greece, Ireland and Portugal into massive bailouts.

Germany, and fellow triple-A rated countries the Netherlands and Luxembourg, faced risks from Greece leaving the euro zone and from the need to stump up cash for potential debt rescues for Spain and Italy, it said.

“The continued deterioration in Spain and Italy’s macroeconomic and funding environment has increased the risk that they will require some kind of external support,” it added.

Germany, seen as absolutely crucial to resolving the crisis, immediately shot back, insisting that it was “itself in a solid economic and financial situation” and that it remained the “euro zone’s anchor of stability.”

The German finance ministry said it had “taken note of Moody’s opinion,” arguing that the ratings agency had put the focus “on short-term risks, while stability prospects in the long term are not mentioned.

“The euro zone has initiated a series of measures which should lead to the durable stabilising of the zone,” the ministry added.

Spain’s borrowing costs hit levels well above seven percent on Monday, prompting sharp falls in Europe’s main stock markets although they leveled off in early trading Tuesday.

The crisis in Spain will be thrashed out in a meeting on Tuesday evening between German Finance Minister Wolfgang Schaeuble will hold talks with Spanish Economy Minister Luis de Guindos in Berlin.

The German economy has up to now proved largely resilient to the crisis, although it is now showing signs of a slowdown, with the euro zone looking to Berlin to take the lead in resolving the impasse.

Jean-Claude Juncker, head of the euro zone finance ministers group, on Tuesday stated his “strong commitment” to euro zone’s stability.

Germany, The Netherlands and Luxembourg have “sound fundamentals,” Juncker said, adding: “Against this background, we reiterate our strong commitment to ensure the stability of the euro area as a whole.”

Christian Schulz at Berenberg Bank said the Moody’s action “exposes the limits of Europe’s current strategy of conditional sovereign bailouts,” calling for the European Central Bank to intervene decisively.

“Ironically, Europe does not really have a debt problem,” Schulz said, noting that overall the United States and Japan were in a worse position.

“Europe has a confidence crisis, largely because of the reluctance of its central bank to intervene forcefully in market panics. Moody’s rating action may bring the end to this reluctance a little closer,” he said.

Moody’s, one of the top three ratings agencies, cited for its decision the likely deepening of the debt crisis, which took a further turn downwards on Monday as Spanish borrowing costs soared and Greece’s second bailout appeared to be in deep trouble.

“The level of uncertainty about the outlook for the euro area, and the potential impact of plausible scenarios on member states, are no longer consistent with stable outlooks,” Moody’s said.