Moody's may lower European sovereign debt ratings

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Moody's Investors Service has said that it may consider downgrading debt ratings for some eurozone nations if Spain seeks a bailout for its banking sector or Greece ends up dropping the euro as its national currency.

The ratings firm said yesterday it is assessing the implications of a bailout for Spain and is prepared to make rating changes to reflect any heightened risk for Spain's government creditors.

There's growing speculation that Spain could decide within days or weeks to ask the European Union for a bailout for its banks, which have been crippled by soured real estate investments.

If Spain ends up asking for aid, that would make it the fourth country in the 17-member eurozone to do so since the EU debt crisis broke out.

Under Moody's rating scale, Spain now has a rating of 'A3,' which is still investment-grade. But the outlook is 'negative,' which means there's at least a 40 per cent chance Moody's will downgrade its ratings for Spain.

Moody's said Spain's banking problem is largely confined to that country and not likely to spill over to other eurozone nations, with the exception of Italy, where the European Central Bank has already stepped in to buy government bonds as a way to help lower the country's borrowing costs.

More nations in the region could be at risk of a ratings downgrade should Greece walk away from the euro, Moody's said.

A shrinking economy, untenable debt and a political backlash against austerity measures have made it increasingly likely that Greece could cease using the euro.

Moody's notes that would lead to substantial losses for investors in Greek securities. Some experts estimate a new Greek currency would lose half or more of its value relative to the euro, driving up inflation and sapping the purchasing power of the average person in Greece.

At the same time, the country's economic output would drop, putting more people out of work where one in five is already unemployed. The prices of imported goods would skyrocket, putting them out of reach for many.